Favoritism and Firms: Micro Evidence and Macro Implications

45 Pages Posted: 7 Apr 2021 Last revised: 6 Jul 2021

See all articles by Zareh Asatryan

Zareh Asatryan

ZEW – Leibniz Centre for European Economic Research

Thushyanthan Baskaran

University of Siegen - Department of Economics

Carlo Birkholz

ZEW – Leibniz Centre for European Economic Research

David Gomtsyan

ZEW – Leibniz Centre for European Economic Research

Date Written: March 1, 2021

Abstract

We study the economic implications of regional favoritism, a form of distributive politics that redistributes resources spatially within countries. We use a large sample of enterprise surveys spanning across many low and middle income countries, and utilize transitions of national political leaders for identification. We document strong evidence of regional favoritism among firms located in close vicinity to leader’s birthplaces but not in other regions, nor in home regions before leader’s rise to power. Firms in favored regions become substantially larger in sales and employment, and also produce more output per worker, pay higher wages and, more generally, have higher total factor productivity. Furthermore, evidence from several mechanisms suggests that leaders divert public resources into their home regions by generating higher demand for firms operating in non-tradable sectors. A simple structural model of resource misallocation that is calibrated to match our empirical estimates implies that favoritism generates aggregat eoutput loss of 0.5% annually.

Keywords: Regional favoritism, firm performance, enterprise surveys, resource misallocation

JEL Classification: D22, D72, O43, R11

Suggested Citation

Asatryan, Zareh and Baskaran, Thushyanthan and Birkholz, Carlo and Gomtsyan, David, Favoritism and Firms: Micro Evidence and Macro Implications (March 1, 2021). ZEW - Centre for European Economic Research Discussion Paper No. 21-031, Available at SSRN: https://ssrn.com/abstract=3820502 or http://dx.doi.org/10.2139/ssrn.3820502

Zareh Asatryan (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Thushyanthan Baskaran

University of Siegen - Department of Economics ( email )

Department of Economics
Hoelderlinstr. 3
Siegen, 57068
Germany

Carlo Birkholz

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

David Gomtsyan

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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