DP15141 Power, Scrutiny, and Congressmen's Favoritism for Friends' Firm

Author(s): Quoc-Anh Do, Yen-Teik Lee, Kieu-Trang Nguyen, Bang Dang Nguyen
Publication Date: August 2020
Date Revised: August 2020
Keyword(s): close election, congressmen, favoritism, political connection, Power, RDD, scrutiny
JEL(s): D72, D73, D85, G14, G32
Programme Areas: Labour Economics, Public Economics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15141

Does more political power always lead to more favoritism? The usual affirmative answer overlooks scrutiny's role in shaping the pattern of favoritism over the ladder of power. When attaining higher-powered positions under even stricter scrutiny, politicians may reduce quid-pro-quo favors towards connected firms to preserve their career prospect. Around close Congress elections, we find RDD-based evidence of this adverse effect that a politician's win reduces his former classmates' firms stock value by 2.8%. As predicted, this effect varies by cross-state scrutiny, politicians' power, firms' size and governance, and connection strength. It diminishes as a politician's career concern fades over time.