Quarterly Journal of Political Science > Vol 6 > Issue 2

The Costs of Political Influence: Firm-Level Evidence From Developing Countries

Raj M. Desai, 1Edmund A. Walsh School of Foreign Service and Department of Government, Georgetown University, the Brookings Institution, desair@georgetown.edu Anders Olofsgård, Edmund A. Walsh School of Foreign Service and Department of Economics, Georgetown University; Stockholm Institute of Transition Economics, Stockholm School of Economics, afo2@georgetown.edu
 
Suggested Citation
Raj M. Desai and Anders Olofsgård (2011), "The Costs of Political Influence: Firm-Level Evidence From Developing Countries", Quarterly Journal of Political Science: Vol. 6: No. 2, pp 137-178. http://dx.doi.org/10.1561/100.00010094

Published: 25 Sep 2011
© 2011 R. M. Desai and A. Olofsgård
 
Subjects
Comparative political economy,  Comparative politics,  Political corruption,  Political economy
 

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In this article:
Political Influence in Business-State Relations
Data and Methodology
Results
Conclusion
References

Abstract

Arrangements by which politically connected firms receive economic favors are a common feature around the world, but little is known of the form or effects of influence in business–government relationships. We present a simple model in which influence requires firms to provide goods of political value in exchange for economic privileges. We argue that political influence improves the business environment for selected firms, but restricts their ability to fire workers. Under these conditions, if political influence primarily lowers fixed costs over variable costs, then favored firms will be less likely to invest and their productivity will suffer, even if they earn higher profits than non-influential firms. We rely on the World Bank's Enterprise Surveys of approximately 8000 firms in 40 developing countries, and control for a number of biases present in the data. We find that influential firms benefit from lower administrative and regulatory barriers (including bribe taxes), greater pricing power, and easier access to credit. But these firms also provide politically valuable benefits to incumbents through bloated payrolls and greater tax payments. Finally, these firms are worse-performing than their non-influential counterparts. Our results highlight a potential channel by which cronyism leads to persistent underdevelopment.

DOI:10.1561/100.00010094

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DOI: 10.1561/100.00010094_supp