Collaborative Research: Political Connections and Firm Behavior

George Mason University, Fairfax VA

Investigators

Abstract

GENERAL SUMMARY This project examines the effect of political connections on firm behavior. Both theory and previous research suggest that political connections confer greater profitability in such environments, but the extent to which such connections have real (as opposed to merely distributional) effects is an open question. To explore this question, the project utilizes a firm-level panel dataset that spans two periods of profound and largely unanticipated disruptions to political connections (the Orange Revolution in 2004 and the Euromaidan Revolution in 2013 and 2014. Contemporary Ukraine is the case of interest. Ukraine provides an environment in which there are weak political institutions and substantial oligarchic control of the economy. The results of this study will provide evidence on the channels through which political connections affect firms and will shed light on the real, as opposed to monetary, consequences of these connections. TECHNICAL SUMMARY This project examines the effect of political connections on firm behavior and productivity, with an empirical focus on contemporary Ukraine. The research utilizes a firm-level panel dataset with many unusual variables (not just profitability, but also productivity, employment, wages, investment, R&D and IT investment, and energy inputs), supplemented with new data on oligarchic ownership. The data span two periods of profound and largely unanticipated disruptions to political connections the Orange Revolution in 2004 and the Euromaidan Revolution in 2013-14. Using new methods developed for this work and leveraging a natural experiment, the analysis will examine not only the direct effect of these shocks on connected firms, but also the indirect effects of spillovers on competitors (which may feed back to political outcomes) and on industry dynamics and productivity. The results of this study will provide evidence on the channels through which political connections affect firms and shed light on the consequences of these connections.