Connecting to power: political connections, innovation, and firm dynamics

80 Pages Posted: 7 Dec 2022

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)

Salomé Baslandze

Federal Reserve Bank of Atlanta

Francesca Lotti

Bank of Italy

Multiple version iconThere are 5 versions of this paper

Date Written: July 28, 2022

Abstract

How do political connections affect firm dynamics, innovation, and creative destruction? We extend a Schumpeterian growth model with political connections that help firms ease their bureaucratic and regulatory burden. The model highlights how political connections influence an economy's business dynamism and innovation, and generate a number of implications guiding our empirical analysis. We construct a new large-scale dataset, for the period 1993-2014, on the universe of firms, workers, and politicians, supplemented by corporate financial statements, patent and election data, so as to define connected firms as those employing local politicians. We identify a leadership paradox: market leaders are much more likely to be politically connected, but much less likely to innovate. Political connections relate to a higher rate of survival, as well as growth in employment and revenues, but not in productivity. This result was also confirmed using the regression discontinuity design. At the aggregate level, gains from political connections do not offset losses stemming from lower reallocation and growth.

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

JEL Classification: O3, O4, D7

Suggested Citation

Akcigit, Ufuk and Baslandze, Salome and Lotti, Francesca, Connecting to power: political connections, innovation, and firm dynamics (July 28, 2022). Bank of Italy Temi di Discussione (Working Paper) No. 1376, Available at SSRN: https://ssrn.com/abstract=4295375 or http://dx.doi.org/10.2139/ssrn.4295375

Ufuk Akcigit

University of Chicago - Department of Economics ( email )

1126 E. 59th St
Chicago, IL 60637
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Center for Economic and Policy Research (CEPR) ( email )

London
United Kingdom

Salome Baslandze

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
30309 (Fax)

HOME PAGE: http://https://sites.google.com/site/sabaslandze/home

Francesca Lotti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
152
Abstract Views
502
Rank
104,425
PlumX Metrics