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The economics of politically-connected firms

  • Choi, Jay Pil
  • Thum, Marcel

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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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
Contact details of provider: Postal: 01062 Dresden
Phone: ++49 351 463 2196
Fax: ++49 351 463 7739
Web page: http://www.tu-dresden.de/wiwi/
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  1. Gene Grossman & Elhanan Helpman, 1994. "Electoral Competition and Special Interest Politics," NBER Working Papers 4877, National Bureau of Economic Research, Inc.
  2. Faccio, Mara & Parsley, David C., 2009. "Sudden Deaths: Taking Stock of Geographic Ties," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(03), pages 683-718, June.
  3. Katz, Michael L & Shapiro, Carl, 1986. "Technology Adoption in the Presence of Network Externalities," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 822-41, August.
  4. Robinson, James A & Verdier, Thierry, 2002. "The Political Economy of Clientelism," CEPR Discussion Papers 3205, C.E.P.R. Discussion Papers.
  5. Choi, Jay Pil & Thum, Marcel, 1998. "Market structure and the timing of technology adoption with network externalities," European Economic Review, Elsevier, vol. 42(2), pages 225-244, February.
  6. Thomas Ferguson & Hans-Joachim Voth, 2008. "Betting on Hitler-The Value of Political Connections in Nazi Germany," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 101-137, 02.
  7. Alberto E. Chong & Mark Gradstein, 2007. "On the Determinants and Effects of Political Influence," IDB Publications (Working Papers) 39978, Inter-American Development Bank.
  8. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
  9. Stephen Coate, 2004. "Political Competition with Campaign Contributions and Informative Advertising," Journal of the European Economic Association, MIT Press, vol. 2(5), pages 772-804, 09.
  10. Grossman, Herschel I. & Noh, Suk Jae, 1994. "Proprietary public finance and economic welfare," Journal of Public Economics, Elsevier, vol. 53(2), pages 187-204, February.
  11. Alberto Chong & Mark Gradstein, 2007. "On the Determinants and Effects of Political Influence," Research Department Publications 4540, Inter-American Development Bank, Research Department.
  12. Kurer, Oskar, 1993. " Clientelism, Corruption, and the Allocation of Resources," Public Choice, Springer, vol. 77(2), pages 259-73, October.
  13. 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, vol. 120(4), pages 1371-1411, November.
  14. Choi, Jay Pil & Thum, Marcel, 2003. "The dynamics of corruption with the ratchet effect," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 427-443, March.
  15. Jay Pil Choi & Marcel Thum, 2004. "The Economics of Repeated Extortion," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 203-223, Summer.
  16. Agrawal, Anup & Knoeber, Charles R, 2001. "Do Some Outside Directors Play a Political Role?," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 179-98, April.
  17. Simon Johnson & Todd Mitton, 2001. "Cronyism and Capital Controls: Evidence from Malaysia," NBER Working Papers 8521, National Bureau of Economic Research, Inc.
  18. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
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