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Politically connected firms and privileged access to credit: Evidence from Central and Eastern Europe

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  • Bussolo, Maurizio
  • de Nicola, Francesca
  • Panizza, Ugo
  • Varghese, Richard

Abstract

We use firm-level data from six Central and Eastern European economies to examine whether political connections ease financial constraints faced by firms. We show that politically connected firms are characterized by higher leverage, lower profitability, and lower productivity of capital than unconnected firms. However, we do not find any significant difference in investment rates between them. Politically connected firms, though less productive than unconnected firms, borrow more because they have easier access to credit. Our results are consistent with the idea that political connections distort capital allocation and may have welfare costs.

Suggested Citation

  • Bussolo, Maurizio & de Nicola, Francesca & Panizza, Ugo & Varghese, Richard, 2022. "Politically connected firms and privileged access to credit: Evidence from Central and Eastern Europe," European Journal of Political Economy, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:poleco:v:71:y:2022:i:c:s0176268021000653
    DOI: 10.1016/j.ejpoleco.2021.102073
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    More about this item

    Keywords

    Investment; Political connections; Corruption; Financial constraints;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • P12 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Enterprises
    • P14 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Property Rights

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