Political Connections and Allocative Distortions
59 Pages Posted: 14 Aug 2014 Last revised: 12 Jan 2018
Date Written: January 8, 2018
Exploiting a unique institutional setting in Korea, this paper documents how politicians can increase the amount of government resources allocated through their social networks to the benefit of private firms connected to these networks. After winning the election, the new president appoints members of his networks as CEOs of state-owned firms that act as intermediaries in allocating government contracts to private firms. In turn, these state firms allocate significantly more procurement contracts to private firms with a CEO from the same network. Contracts allocated to connected private firms are executed systematically worse and exhibit more frequent cost increases through renegotiations.
Keywords: allocative efficiency, political connections, public procurement, rent-seeking, social networks
JEL Classification: D61, D72, G30, H57
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