Political Connections and Financial Constraints: Evidence from Transition Countries

32 Pages Posted: 7 Aug 2019

See all articles by Maurizio Bussolo

Maurizio Bussolo

World Bank - Chief Economist Office for Europe and Central Asia

Francesca de Nicola

World Bank

Ugo Panizza

United Nations - Conference on Trade and Development (UNCTAD); Graduate Institute of International and Development Studies (IHEID)

Richard Varghese

Graduate Institute of International and Development Studies (IHEID)

Date Written: August 6, 2019

Abstract

This paper examines whether political connections ease financial constraints faced by firms. Using firm-level data from six Central and Eastern European economies, the paper shows that politically connected firms: (i) have high levels of leverage, (ii) have low levels of profitability, (iii) are less capitalized, (iv) have low marginal productivity of capital, and (v) do not invest more than unconnected firms. Next, the paper shows that connected firms borrow more because they have easier access to credit and that political connections lead to a misallocation of capital. The results are consistent with the idea that political connections distort capital allocation and may have welfare costs.

Keywords: Economics and Finance of Public Institution Development, State Owned Enterprise Reform, Economic Theory & Research, Economic Growth, Industrial Economics, Financial Regulation & Supervision, De Facto Governments, Public Sector Administrative & Civil Service Reform, Public Sector Administrative and Civil Service Reform, Administrative & Civil Service Reform, Democratic Government, Armed Conflict

Suggested Citation

Bussolo, Maurizio and de Nicola, Francesca and Panizza, Ugo G. and Varghese, Richard, Political Connections and Financial Constraints: Evidence from Transition Countries (August 6, 2019). World Bank Policy Research Working Paper No. 8956. Available at SSRN: https://ssrn.com/abstract=3433449

Maurizio Bussolo (Contact Author)

World Bank - Chief Economist Office for Europe and Central Asia ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://https://blogs.worldbank.org/team/maurizio-bussolo

Francesca De Nicola

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Ugo G. Panizza

United Nations - Conference on Trade and Development (UNCTAD) ( email )

Palais des Nations
Office E 8074
Geneva, 1211
Switzerland

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Richard Varghese

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

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