Political Connections and Financial Constraints: Evidence from Central and Eastern Europe

35 Pages Posted: 4 Dec 2019

See all articles by Maurizio Bussolo

Maurizio Bussolo

World Bank - Chief Economist Office for Europe and Central Asia

Francesca de Nicola

World Bank

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics; CEPR

Richard Varghese

Graduate Institute of International and Development Studies (IHEID)

Date Written: November 2019

Abstract

We examine whether political connections ease financial constraints faced byfirms. Usingfirm-level data from six Central and Eastern European economies, we show that politically connected firms are characterized by: (i) higher leverage, (ii) lower pofitability, (iii) lower capitalization, (iv) lower marginal productivity of capital, and (v) lower levels of investment than unconnected firms. Politically connected firms borrow more because they have easier access than unconnectedfirms to credit but tend to be less productive than unconnected firms. Our results are consistent with the idea that political connections distort capital allocation and may have welfare costs.

Keywords: Corruption, Financial constraints, investment, Political Connections

JEL Classification: D22, O17, P12, P14

Suggested Citation

Bussolo, Maurizio and de Nicola, Francesca and Panizza, Ugo and Varghese, Richard, Political Connections and Financial Constraints: Evidence from Central and Eastern Europe (November 2019). CEPR Discussion Paper No. DP14126, Available at SSRN: https://ssrn.com/abstract=3496615

Maurizio Bussolo (Contact Author)

World Bank - Chief Economist Office for Europe and Central Asia ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://https://blogs.worldbank.org/team/maurizio-bussolo

Francesca De Nicola

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

CEPR ( email )

London
United Kingdom

Richard Varghese

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

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