The Golden Revolving Door: Hedging through Hiring Government Officials

Abstract

Using both the onset of the US-China trade war in 2018 and the most recent Russia-Ukraine conflict and associated trade tensions, we show that government-linked firms increase their importing activity by roughly 33% (t=4.01) following the shock, while non-government linked firms trading to the same countries do the opposite, decreasing activity. These increases appear targeted, in that we see no increase for government-linked supplier firms generally to other countries (even countries in the same regions) at the same time, nor of these same firms in these regions at other times of no tension. In terms of mechanism, government supplier-linked firms are nearly twice as likely to receive tariff exemptions as equivalent firms doing trade in the region who are not also government suppliers. More broadly, these effects are increasing in level of government connection. For example, firms that are geographically closer to the agencies to which they supply increase their imports more acutely. Using micro-level data, we find that government supplying firms that recruit more employees with past government work experience also increase their importing activity more – particularly when the past employee worked in a contracting role. Lastly, we find evidence that this results in sizable accrued benefits in terms of firm-level profitability, market share gains, and outsized stock returns.

Keywords: Government Connection, Government Suppliers, Trade Disruptions

JEL Classification: D72, H57