Connecting to power: political connections, innovation, and firm dynamics

Ufuk Akcigit, Salomé Baslandze (baslandze.salome@gmail.com) and Francesca Lotti
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Salomé Baslandze: Federal Reserve Bank of Atlanta

No 1376, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: How do political connections affect firm dynamics, innovation, and creative destruction? We extend a Schumpeterian growth model with political connections that help firms ease their bureaucratic and regulatory burden. The model highlights how political connections influence an economy's business dynamism and innovation, and generate a number of implications guiding our empirical analysis. We construct a new large-scale dataset, for the period 1993-2014, on the universe of firms, workers, and politicians, supplemented by corporate financial statements, patent and election data, so as to define connected firms as those employing local politicians. We identify a leadership paradox: market leaders are much more likely to be politically connected, but much less likely to innovate. Political connections relate to a higher rate of survival, as well as growth in employment and revenues, but not in productivity. This result was also confirmed using the regression discontinuity design. At the aggregate level, gains from political connections do not offset losses stemming from lower reallocation and growth.

Keywords: firm dynamics; innovation; political connections; creative destruction; productivity (search for similar items in EconPapers)
JEL-codes: D7 O3 O4 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-bec, nep-ent, nep-gro, nep-ino, nep-pol, nep-sbm, nep-soc and nep-tid
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Connecting to Power: Political Connections, Innovation, and Firm Dynamics (2023)
Working Paper: Connecting to Power: Political Connections, Innovation, and Firm Dynamics (2020)
Working Paper: Connecting to Power: Political Connections, Innovation, and Firm Dynamics (2018)
Working Paper: Connecting to Power: Political Connections, Innovation, and Firm Dynamics (2018)
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