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Politicians at work. The private returns and social costs of political connections

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Author Info
Federico Cingano () (Bank of Italy, Economic Research Department)
Paolo Pinotti () (Bank of Italy, Economic Research Department)

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Abstract

We quantify the private returns and social costs of political connections exploiting a unique longitudinal dataset that combines matched employer-employee data for a representative sample of Italian firms with administrative archives on the universe of individuals appointed in local governments over the period 1985-97. According to our results, the revenue premium granted by political connections amounts to 5% on average, it is obtained through changes in domestic sales but not in exports, and it is not related to improvements in firm productivity. The connection premium is positive for upstream producers for the public administration only, and larger (up to 25%) in areas characterized by high public expenditure and high levels of corruption. These findings suggest that the gains in market power derive from public demand shifts towards politically connected firms. We estimate such shifts reduce the provision of public goods by approximately 20%.

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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 709.

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Date of creation: May 2009
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Handle: RePEc:bdi:wptemi:td_709_09

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Related research
Keywords: political connections; social welfare; productivity; employer-employee data;

Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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