Favoritism and Firms: Micro Evidence and Macro Implications

60 Pages Posted: 16 Jun 2022

See all articles by Zareh Asatryan

Zareh Asatryan

ZEW Mannheim

Thushyanthan Baskaran

University of Siegen

Carlo Birkholz

ZEW Mannheim

David Gomtsyan

ZEW – Leibniz Centre for European Economic Research

Date Written: 2022

Abstract

We study the economic implications of regional favoritism, a form of distributive politics that redistributes resources geographically within countries. Using enterprise surveys from low- and middle-income countries, we document that firms located close to leaders’ birthplaces grow substantially in sales and employment after leaders assume office. Firms in favored areas also experience increases in sales per worker, wages, and measured total factor productivity. These effects are short-lived, and operate through rising (public) demand for the non-tradable sector. We calibrate a simple structural model of resource misallocation on our estimates. This exercise implies that favoritism reduces output by 0.5% annually.

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

JEL Classification: D220, D720, O430, R110

Suggested Citation

Asatryan, Zareh and Baskaran, Thushyanthan and Birkholz, Carlo and Gomtsyan, David, Favoritism and Firms: Micro Evidence and Macro Implications (2022). CESifo Working Paper No. 9797, Available at SSRN: https://ssrn.com/abstract=4137954 or http://dx.doi.org/10.2139/ssrn.4137954

Zareh Asatryan (Contact Author)

ZEW Mannheim ( email )

Mannheim
Germany

Thushyanthan Baskaran

University of Siegen ( email )

Hoelderlinstrasse 3
57068 Siegen, NRW 57068
Germany

Carlo Birkholz

ZEW Mannheim ( email )

Mannheim
Germany

David Gomtsyan

ZEW – Leibniz Centre for European Economic Research ( email )

L 7, 1
Mannheim, L 7, 1
Germany

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