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

Ufuk Akcigit, Salome Baslandze and Francesca Lotti

No 25136, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How do political connections affect firm dynamics, innovation, and creative destruction? To answer this question, 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 generates a number of theoretical testable predictions and highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity. We test the predictions of our model using a brand-new dataset on Italian firms and their workers, 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.

JEL-codes: D70 O3 O4 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-bec, nep-eff, nep-ent, nep-eur, nep-ino, nep-pol, nep-soc and nep-tid
Note: EFG POL PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

Published as Ufuk Akcigit & Salomé Baslandze & Francesca Lotti, 2023. "Connecting to Power: Political Connections, Innovation, and Firm Dynamics," Econometrica, Econometric Society, vol. 91(2), pages 529-564, March.

Downloads: (external link)
http://www.nber.org/papers/w25136.pdf (application/pdf)

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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:25136

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w25136

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().