Knowing the Right Person in the Right Place: Political Connections and economic Growth
University of Bologna - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Carlotta Berti Ceroni
University of Bologna - Department of Economics
University of Bologna; Fondazione Eni Enrico Mattei (FEEM)
CESifo Working Paper Series No. 2553
FEEM Working Paper No. 107.2009
Using data on a panel of 56 democratic countries in the period 1975-2004, we find evidence of a negative association between political stability and economic growth which is stronger and empirically more robust in countries with high bureaucratic costs. Motivated by these results, which contrast with previous contributions, we develop a model of growth with quality improvements where political connections with long-term politicians can be exploited by low-quality producers to defend their monopoly position and prevent innovation and entry of high-quality competitors. This requires that the incumbent politician remains in office and that the red-tape cost advantage granted by political connections is large relative to the quality upgrade related to innovation. Consistently with our empirical findings, the model delivers a negative association between the probability that the incumbent politician remains in office and average economic growth in the presence of high bureaucratic costs.
Number of Pages in PDF File: 41
Keywords: political persistence, growth, innovation
JEL Classification: O43working papers series
Date posted: February 24, 2009
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