Beyond Political Connections : A Measurement Model Approach to Estimating Firm-levelPolitical Influence in 41 Economies

This paper considers the political influence of private firms. While such influence isfrequently discussed, there is limited analysis of how firms combine political interactions, and under what conditions,to gain influence. The exception is the large literature on firms with political connections, with findings generallyshowing large gains to firms with those direct relationships. This paper extends the discussion ofinfluence beyond political connections alone and uses a rich firm-level data set from 41 economies, which includesinformation on several interactions with political actors. Using a Bayesian item response theory (IRT) measurementmodel, an index of Political Influence is estimated, with the prior assumption that political connections yield moreinfluence. Membership in a business association is found to enhance influence, while such influence is offset by bribes,state ownership, firm size, and a reliance on collective lobbying. Political Influence is found to be broadly higherin economies with poorer governance but more dispersed in those with better governance. Within economies, higherinfluence is associated with a higher likelihood of reporting a small number of competitors, higher sales, andlower labor inputs relative to sales. These findings are robust across several models that incorporatehigh-dimensional fixed effects, incorporating measurement error in the index, and varying these relationships overseveral governance measures.