DP13216 Connecting to Power: Political Connections, Innovation, and Firm Dynamics

Author(s): Ufuk Akcigit, Salomé Baslandze, Francesca Lotti
Publication Date: October 2018
Keyword(s): creative destruction, Firm Dynamics, Innovation, Political Connections, productivity
JEL(s): D7, O3, O4
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13216

Do political connections affect firm dynamics, innovation, and creative destruction? We study Italian firms and their workers to answer this question. Our analysis uses a brand-new dataset, spanning the period from 1993 to 2014, where we merge: (i) firm-level balance sheet data; (ii) social security data on the universe of workers; (iii) patent data from the European Patent Office; (iv) the national registry of local politicians; and (v) detailed data on local elections in Italy. We find that firm-level political connections are widespread, especially among large firms, and that industries with a larger share of politically connected firms feature worse firm dynamics. We identify a leadership paradox: When compared to their competitors, market leaders are much more likely to be politically connected, but much less likely to innovate. In addition, political connections relate to a higher rate of survival, as well as growth in employment and revenue, but not in productivity - a result that we also confirm using a regression discontinuity design. We build a firm dynamics model, where we allow firms to invest in innovation and/or political connection to advance their productivity and to overcome certain market frictions. Our model highlights a new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity.