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. When compared to their competitors, market leaders are much more likely to be politically connected and 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 – the 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 the new interaction between static gains and dynamic losses from rent-seeking in aggregate productivity.

More Research From These Scholars

BFI Working Paper Apr 27, 2018

Innovation and Trade Policy in a Globalized World

Ufuk Akcigit, Sina T. Ates
Topics:  Fiscal Studies
BFI Working Paper Sep 1, 2018

Taxation and Innovation in the 20th Century

Ufuk Akcigit, John Grigsby, Tom Nicholas, Stefanie Stantcheva
Topics:  Fiscal Studies, Economic Mobility & Poverty, Tax & Budget
BFI Working Paper Apr 15, 2019

What Happened to U.S. Business Dynamism?

Ufuk Akcigit, Sina T. Ates
Topics:  Technology & Innovation