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Favoritism and Firms: Micro Evidence and Macro Implications

Zareh Asatryan,T. Baskaran,Carlo Birkholz,David Gomtsyan

Published 2021 in Social Science Research Network

ABSTRACT

We study the economic implications of regional favoritism, a form of distributive politics that redistributes resources spatially within countries. We use a large sample of enterprise surveys spanning across many low and middle income countries, and utilize transitions of national political leaders for identification. We document strong evidence of regional favoritism among firms located in close vicinity to leader’s birthplaces but not in other regions, nor in home regions before leader’s rise to power. Firms in favored regions become substantially larger in sales and employment, and also produce more output per worker, pay higher wages and, more generally, have higher total factor productivity. Furthermore, evidence from several mechanisms suggests that leaders divert public resources into their home regions by generating higher demand for firms operating in non-tradable sectors. A simple structural model of resource misallocation that is calibrated to match our empirical estimates implies that favoritism generates aggregat eoutput loss of 0.5% annually.

PUBLICATION RECORD

  • Publication year

    2021

  • Venue

    Social Science Research Network

  • Publication date

    2021-03-01

  • Fields of study

    Business, Economics, Political Science

  • Identifiers
    DOI 10.2139/SSRN.3820502
  • External record

    Open on Semantic Scholar

  • Source metadata

    Semantic Scholar

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