Discussion paper

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

Does higher office always lead to more favoritism? We argue that firms may lose their benefit from a connected politician’s ascent to higher office, if it entails stricter scrutiny that may reduce favoritism. 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 3.2% after a week. Exploiting the entry of Craigslist across the U.S., we find that state-level scrutiny drives this effect. It further varies with politician’s power, firm size and governance, and connection strength, and diminishes as a politician’s career concern fades over time.


Do, Q, Y Lee, B Nguyen and K Nguyen (2020), ‘DP15141 Power, Scrutiny, and Congressmen's Favoritism for Friends' Firm‘, CEPR Discussion Paper No. 15141. CEPR Press, Paris & London. https://cepr.org/publications/dp15141