Friends in High Places: An Examination of Politically Connected Governments

Abstract

We examine variation in the power of U.S. local governments’ representation in Congress and provide evidence of a negative link between political connections and local govern- ments’ stewardship over public resources. To help establish causality, we use plausibly exogenous terminations of powerful political connections and document that local gov- ernments subsequently experience decreases in their federal resources and then improve their stewardship. Furthermore, our results are mitigated in states with a limited history of corruption and in the presence of local political competition. In sum, our evidence suggests that powerful political representation weakens local governmental incentives to act in a socially optimal manner.

Keywords: Political economy, Stewardship, Financial reports, Senate, House of Representatives, City, County

JEL Classification: G18, G38, H1, H7, H83, M4