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 (50)

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.

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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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