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The economics of politically-connected firms

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  • Choi, Jay Pil
  • Thum, Marcel

Abstract

Political connections between firms and autocratic regimes are not secret and often even publicly displayed in many developing economies. We argue that tying a firm's available rent to a regime’s survival acts as a credible commitment forcing entrepreneurs to support the government and to exert effort in its stabilization. In return, politically-connected firms get access to profitable markets and are exempted from the regime's extortion. We show that such a gift exchange between government and politically-connected firms can only exist if certain institutional conditions are met. In particular, the stability of the regime has to be sufficiently low and the regime needs the power to exploit independent firms. We also show that building up a network of politically-connected firms acts as a substitute for investments in autonomous stability (such as spending on military and police force). The indirect strategy of stabilizing a regime via politically-connected firms gradually becomes inferior when a regime's exploitative power rises. --

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Bibliographic Info

Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 07/08.

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Date of creation: 2008
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Handle: RePEc:zbw:tuddps:0708

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Keywords: Politically-Connected Firms; Clientelism; Political Stability;

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References

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  1. Ferguson, Thomas & Voth, Hans-Joachim, 2005. "Betting on Hitler - The Value of Political Connections in Nazi Germany," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5021, C.E.P.R. Discussion Papers.
  2. Faccio, Mara & Parsley, David C., 2009. "Sudden Deaths: Taking Stock of Geographic Ties," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 44(03), pages 683-718, June.
  3. Alberto Chong & Mark Gradstein, 2007. "On the Determinants and Effects of Political Influence," Research Department Publications, Inter-American Development Bank, Research Department 4540, Inter-American Development Bank, Research Department.
  4. James A. Robinson & Thierry Verdier, 2013. "The Political Economy of Clientelism," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 115(2), pages 260-291, 04.
  5. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, American Economic Association, vol. 91(4), pages 1095-1102, September.
  6. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, American Economic Association, vol. 96(1), pages 369-386, March.
  7. Grossman, Gene M & Helpman, Elhanan, 1996. "Electoral Competition and Special Interest Politics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 63(2), pages 265-86, April.
  8. Choi, Jay Pil & Thum, Marcel, 2003. "The economics of repeated extortion," Dresden Discussion Paper Series in Economics 13/03, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  9. Kurer, Oskar, 1993. " Clientelism, Corruption, and the Allocation of Resources," Public Choice, Springer, Springer, vol. 77(2), pages 259-73, October.
  10. Alberto E. Chong & Mark Gradstein, 2007. "On the Determinants and Effects of Political Influence," IDB Publications 39978, Inter-American Development Bank.
  11. Stephen Coate, 2001. "Political Competition with Campaign Contributions and Informative Advertising," NBER Working Papers 8693, National Bureau of Economic Research, Inc.
  12. Simon Johnson & Todd Mitton, 2001. "Cronyism and Capital Controls: Evidence from Malaysia," NBER Working Papers 8521, National Bureau of Economic Research, Inc.
  13. Choi, Jay Pil & Thum, Marcel, 2003. "The dynamics of corruption with the ratchet effect," Journal of Public Economics, Elsevier, Elsevier, vol. 87(3-4), pages 427-443, March.
  14. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(4), pages 1371-1411, November.
  15. Grossman, Herschel I. & Noh, Suk Jae, 1994. "Proprietary public finance and economic welfare," Journal of Public Economics, Elsevier, Elsevier, vol. 53(2), pages 187-204, February.
  16. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(4), pages 822-41, August.
  17. Choi, J.P., 1996. "Market Structure and the Timing of Technology Adoption with Network Externalities," Discussion Papers, Columbia University, Department of Economics 1996_06, Columbia University, Department of Economics.
  18. Agrawal, Anup & Knoeber, Charles R, 2001. "Do Some Outside Directors Play a Political Role?," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 44(1), pages 179-98, April.
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Citations

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Cited by:
  1. Alberto Chong & Mark Gradstein, 2007. "On the Determinants and Effects of Political Influence," Research Department Publications, Inter-American Development Bank, Research Department 4540, Inter-American Development Bank, Research Department.
  2. Hasan, Iftekhar & Jackowicz, Krzysztof & Kowalewski , Oskar & Kozlowski , Lukasz, 2014. "Politically connected firms in Poland and their access to bank financing," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 2/2014, Bank of Finland, Institute for Economies in Transition.
  3. Alberto Chong & Mark Gradstein, 2007. "Sobre los determinantes y efectos de la influencia de politica (On the Determinants and Effects of Political Influence)," Research Department Publications, Inter-American Development Bank, Research Department 4541, Inter-American Development Bank, Research Department.
  4. Yakovlev, Andrei, 2008. "State-business relations and improvement of corporate governance in Russia," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 26/2008, Bank of Finland, Institute for Economies in Transition.

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