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

66 Pages Posted: 8 Oct 2018

See all articles by Ufuk Akcigit

Ufuk Akcigit

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); Center for Economic and Policy Research (CEPR)

Salomé Baslandze

Federal Reserve Bank of Atlanta

Francesca Lotti

Bank of Italy

Multiple version iconThere are 4 versions of this paper

Date Written: October 2018

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.

Suggested Citation

Akcigit, Ufuk and Baslandze, Salome and Lotti, Francesca, Connecting to Power: Political Connections, Innovation, and Firm Dynamics (October 2018). NBER Working Paper No. w25136, Available at SSRN: https://ssrn.com/abstract=3262399

Ufuk Akcigit (Contact Author)

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

HOME PAGE: http://www.ufukakcigit.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Center for Economic and Policy Research (CEPR) ( email )

London
United Kingdom

Salome Baslandze

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
30309 (Fax)

HOME PAGE: http://https://sites.google.com/site/sabaslandze/home

Francesca Lotti

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
23
Abstract Views
562
PlumX Metrics