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Political Connections and Allocative Distortions

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  • DAVID SCHOENHERR

Abstract

Exploiting a unique institutional setting in Korea, this paper documents that politicians can increase the amount of government resources allocated through their social networks to the benefit of private firms connected to these networks. After winning the election, the new president appoints members of his networks as CEOs of state‐owned firms that act as intermediaries in allocating government contracts to private firms. In turn, these state firms allocate significantly more procurement contracts to private firms with a CEO from the same network. Contracts allocated to connected private firms are executed systematically worse and exhibit more frequent cost increases through renegotiations.

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  • David Schoenherr, 2019. "Political Connections and Allocative Distortions," Journal of Finance, American Finance Association, vol. 74(2), pages 543-586, April.
  • Handle: RePEc:bla:jfinan:v:74:y:2019:i:2:p:543-586
    DOI: 10.1111/jofi.12751
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