Connecting to Power: Political Connections, Innovation, and Firm Dynamics

Ufuk Akcigit, Salome Baslandze and Francesca Lotti

No 13216, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Do political connections affect firm dynamics, innovation, and creative destruction? We study Italian firms and their workers to answer this question. Our analysis uses a brand-new dataset, spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii) social security data on the universe of workers; (iii) patent data from the European Patent Office; (iv) the national registry of local politicians; and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. We identify a leadership paradox: When compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity – a result that we also confirm using a regression discontinuity design. We build a firm dynamics model, where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. Our model highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity.

Keywords: Political connections; Creative destruction; Firm dynamics; Innovation; Productivity (search for similar items in EconPapers)
JEL-codes: D7 O3 O4 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-bec, nep-ent, nep-ino, nep-lma, nep-pol, nep-soc and nep-tid
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Citations: View citations in EconPapers (47)

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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 (2022)
Working Paper: Connecting to Power: Political Connections, Innovation, and Firm Dynamics (2020)
Working Paper: Connecting to Power: Political Connections, Innovation, and Firm Dynamics (2018)
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