Connecting to Power: Political Conn ections, Innovation, and Firm Dynamics (with Ufuk Akcigit and Fran cesca Lotti)
Abstract:
Do
political connections affect firm and industry dynamics? We study the Itali
an firms and their workers to answer this question. Our analysis uses a bra
nd-new data spanning the period from 1993 to 2014 where we merge: (i) firm-
level balance sheet data, (ii) universe of social security data on workers,
(iii) patent data from the European Patent Office, (iv) registry of local
politicians, and (v) detailed data on local elections in Italy. We find tha
t firm-level political connections are widespread, especially among large f
irms, and that the industries with more politically connected firms feature
worse firm dynamics. Market leaders are much more likely to hire a politic
ian and less likely to innovate, compared to their competitors. In addition
, connections relate to higher survival and growth in employment and sales
but not in productivity. We build a firm dynamics model where we allow firm
s to invest in innovation and/or rent-seeking to advance their productivity
and to overcome regulatory or bureaucratic burden. The model highlights an
interaction between static gains and dynamic losses from rent-seeking for
aggregate productivity.