The Rise of a Network: The Spillover of Political Patronage and Cronyism to the Private Sector
51 Pages Posted: 13 Nov 2018 Last revised: 4 Jun 2019
Date Written: June 3, 2019
The misallocation of government resources to the politically connected is considered to impose substantial economic costs. In this paper, we document that preferential access to resources for the politically connected extends to the private sector. Following a presidential election in Korea in 2007, private banks appoint executives from the new president's networks to establish links to the new administration. Private firms with links to the new president's alumni network through their CEO experience easier access to private bank credit after the election. In-network firms pay lower interest rates and are protected from bankruptcy through new credit that is used for refinancing existing debt rather than profitable investments and restructurings of existing debt. Preferential treatment is limited to banks that appoint executives from the new president's alumni network. Exploiting variation for the same firm across lenders over time allows us to control for firm-time fixed effects, sharpening the identification of the results. We estimate that banks incur aggregate losses equivalent to 0.04 percent of GDP due to preferential treatment of connected firms.
Keywords: allocative efficiency, banks, political connections, social networks
JEL Classification: D61, D72, G21, L14
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