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Cronyism, Corruption and Growth

Paper Session

Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM

Atlanta Marriott Marquis, A601
Hosted By: American Economic Association
  • Chair: Luigi Zingales, University of Chicago

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

Ufuk Akcigit
,
University of Chicago
Salomé Baslandze
,
Einaudi Institute for Economics and Finance
Francesca Lotti
,
Bank of Italy

Abstract

Do political connections affect firm and industry dynamics? We study the Italian firms and their workers to answer this question. Our analysis uses a brand-new data spanning the period from 1993 to 2014 where we merge: (i) firm-level balance sheet data, (ii) universe of social security data on workers, (iii) patent data from the European Patent Office, (iv) 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 the industries with more politically connected firms feature worse firm dynamics. Market leaders are much more likely to hire a politician and less likely to innovate, compared to their competitors. In addition, connections relate to higher survival and growth in employment and sales but not in productivity. We build a firm dynamics model where we allow firms to invest in innovation and/or political connections to advance their productivity and to overcome regulatory or bureaucratic burden. The model highlights the new interaction between static gains and dynamic losses from rent-seeking for aggregate productivity.

Corruption and Firms: Evidence from Randomized Audits in Brazil

Emanuele Colonnelli
,
University of Chicago
Mounu Prem
,
Del Rosario University

Abstract

We exploit spatial variation in randomized anti-corruption audits related to government procurement contracts in Brazil to assess how corruption affects resource allocation, firm performance, and the local economy. After an anti-corruption crackdown, regions experience more entrepreneurship, improved access to finance, and higher levels of economic activity. This is inconsistent with corruption acting as “grease in the wheel.” We find that two channels explain these facts: allocation of resources to less efficient firms, and distortions in government dependent firms. Using firms involved in corrupt business with the municipality, i.e. “corrupt firms,” we find that the second channel is more important. Difference in difference estimation suggests that, after audits, the performance of corrupt firms improves relative to a similar set of unaffected firms. Corrupt firms invest more, increase borrowing and leverage, reallocate labor inside the firm, restructure the organizational design by increasing hierarchical layers, rely less on government contracts, and grow faster. Our findings provide novel micro-evidence on why corruption acts as an institutional failure that is detrimental to firm performance and economic growth.

Electoral Incentives and the Allocation of Public Funds

Frederico Finan
,
University of California-Berkeley
Maurizio Mazzocco
,
University of California-Los Angeles

Abstract

Politicians allocate public resources in ways that maximize political gains, and potentially at the cost of lower welfare. In this paper, we quantify these welfare costs in the context of Brazil’s federal legislature, which grants its members a budget to fund public projects within their states. Using data from the state of Roriama, we estimate a model of politicians’ allocation decisions and find that 25 percent of the public funds allocated by legislators are distorted relative to a social planner’s allocation. We then use the model to simulate two potential policy reforms to the electoral system: the adoption of approval voting and imposing a one-term limit. We find that both policies are effective at reducing distortions. The one-term limit policy, however, increases corruption, which makes it a welfare-reducing policy.

Diagnosing the Italian Disease

Bruno Pellegrino
,
University of California-Los Angeles
Luigi Zingales
,
University of Chicago

Abstract

We investigate why Italy’s labor productivity abruptly stopped growing in the mid-1990s. We find no evidence that this slowdown is due to trade dynamics, Italy’s inefficient governmental apparatus, or excessively protective labor regulations. By contrast, the data suggest that Italy’s slowdown was more likely caused by the failure of its firms to take full advantage of the ICT revolution. While many institutional features can account for this failure, a prominent one is the lack of meritocracy in the selection and rewarding of managers. Familism and cronyism are the ultimate causes of the Italian disease.
JEL Classifications
  • O4 - Economic Growth and Aggregate Productivity
  • P0 - General