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

65 Pages Posted: 29 Apr 2020

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)

Salome Baslandze

affiliation not provided to SSRN

Francesca Lotti

Bank of Italy

Multiple version iconThere are 4 versions of this paper

Date Written: April, 2020

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. Our dataset spans 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.

Keywords: political connections, productivity, innovation, firm dynamics, creative destruction

JEL Classification: O30, O43

Suggested Citation

Akcigit, Ufuk and Baslandze, Salome and Lotti, Francesca, Connecting to Power: Political Connections, Innovation, and Firm Dynamics (April, 2020). FRB Atlanta Working Paper No. 2020-5, Available at SSRN: https://ssrn.com/abstract=3587625 or http://dx.doi.org/10.29338/wp2020-05

Ufuk Akcigit (Contact Author)

University of Chicago - Department of Economics ( email )

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Center for Economic and Policy Research (CEPR) ( email )

London
United Kingdom

Salome Baslandze

affiliation not provided to SSRN

Francesca Lotti

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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