Political Connections and Allocative Distortions

By David Schoenherr. Journal of Finance, 2015

229 citations recorded by the source corpus.

This paper exploits a unique institutional setting to examine the effects of firms' political connections on the allocation of government procurement contracts. After winning the presidential election in Korea in 2007, the new president, Lee Myung Bak, appoints several members of his networks as CEOs of state-owned firms. In turn, these state firms allocate significantly more procurement contracts to private firms with a CEO from the same network. The systematically poor execution of contracts allocated to connected firms suggests that contracts are misallocated. Back of the envelope calculations suggest that each dollar in contract volume transferred from non-connected to connected firms leads to a cost of 17-26 cents to the economy, resulting in a total annual cost of about 0.21-0.32% of GDP.

Subfields: Communication, Political Science and International Relations, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/aeb09ba7303ae05ceaeece290d08e8072da839f8

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Citations in the corpus

Patronage and Selection in Public Sector Organizations (2020, background): “Finally, we contribute to a long literature on the role of political connections for firms (Fisman, 2001; Khwaja and Mian, 2005; Faccio, 2006; Faccio et al., 2006; Cingano and Pinotti, 2013; Schoenherr, 2017) and individuals (Markussen and Tarp, 2014; Gagliarducci and Manacorda, 2017; Folke et al.”
The Cost of Political Connections (2018, unknown): “1 More recent papers have shown that, even in developed countries, access to political networks can affect firm outcomes; see Sapienza (2004), Amore and Bennedsen (2013), Adelino and Dinç (2014), and Schoenherr (2018).”