[Research Seminar 2019.07.23]The Rise of a Network: The Spillover of Political Patronage and Cronyism to the Private SectorSpeaker : David Schoenherr
The misallocation of government resources to the politically connected is considered to impose substantial economic costs. We document that preferential access for the politically connected extends to resources allocated by private sector firms. Following a presidential election in Korea in 2007, private banks appoint executives from the new president’s networks to establish links to the new administration. As a consequence, private firms with links to the new president’s alumni network experience better access to private bank credit. In-network firms pay lower interest rates and are protected from bankruptcy through debt restructurings. Preferential treatment is limited to banks that appoint executives from the new president’s alumni network. Exploiting variation for the same firm across lenders over time allows us to control for firm-time fixed effects, sharpening the identification of the results. We estimate that banks incur aggregate losses equivalent to 0.045 percent of GDP due to preferential treatment of connected firms.