The Rise of a Network: Spillover of Political Patronage and Cronyism to the Private Sector

Terry Moon and David Schoenherr
Additional contact information
Terry Moon: University of British Columbia
David Schoenherr: Princeton University

Working Papers from Princeton University. Economics Department.

Abstract: The misallocation of government resources to the politically connected is considered to impose substantial economic costs. We document that resource misallocation to the politically connected extends to resources allocated by private sector firms. Following the presidential election in 2007, private banks in Korea appoint executives from the new president’s alumni network in an effort to establish links to the new administration. In turn, private banks that appoint executives from the president’s alumni network allocate more credit to firms with links to the same network through their CEOs. Additionally, in-network firms pay lower interest rates and are protected from default through debt restructurings. Exploiting variation for the same firm across different lenders over time allows us to control for firm-time fixed effects, sharpening the identification of the results. We estimate that private banks incur aggregate losses equivalent to 4.5 basis points of GDP due to preferential treatment of in-network firms.

Keywords: allocative efficiency; banks; networks; patronage; rent-seeking (search for similar items in EconPapers)
JEL-codes: D61 D72 G21 L14 P16 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-des, nep-mic and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
https://drive.google.com/file/d/1eXZu6zdR7uXRKvA1BPUHwZh5DhFfNadw/view

Related works:
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:pri:econom:2020-72

Access Statistics for this paper

More papers in Working Papers from Princeton University. Economics Department. Contact information at EDIRC.
Bibliographic data for series maintained by Bobray Bordelon ().