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Political Connections and the Economy

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Loews Philadelphia, Commonwealth Hall C
Hosted By: American Finance Association
  • Chair: David Matsa, Northwestern University

Securing Property Rights

Edward Glaeser
,
Harvard University
Giacomo Ponzetto
,
CREI, Pompeu Fabra University, IPEG, & Barcelona GSE
Andrei Shleifer
,
Harvard University

Abstract

A central challenge in securing property rights is the subversion of justice through legal
skill, bribery, or physical force by the strong—the state or its powerful citizens—against the
weak. We present evidence that the less educated and poorer citizens in many countries feel their
property rights are least secure. We then present a model of a farmer and a mine which can
pollute his farm in a jurisdiction where the mine can subvert law enforcement. We show that, in
this model, injunctions or other forms of property rules work better than compensation for
damage or liability rules. The equivalences of the Coase Theorem break down in realistic ways.
The case for injunctions is even stronger when parties can invest in power. Our approach sheds
light on several controversies in law and economics, but also applies to practical problems in
developing countries, such as low demand for formality, law enforcement under uncertain
property rights, and unresolved conflicts between environmental damage and development.

"Trading" Political Favors: Evidence From the Impact of the STOCK Act

Ruidi Huang
,
University of Illinois-Urbana-Champaign
Yuhai Xuan
,
University of Illinois-Urbana-Champaign

Abstract

This paper demonstrates the tacit benefits that accrue to both politicians and the firms to which they are connected through stock ownership. Specifically, we show strong evidence that politicians use private information and political favors for financial gains from stock investments in their personal portfolios, and that these favors have a real impact on the value and economic outcomes of the firms in which they invest. To do so, we assemble the stock ownership and trading data for all members of the U. S. Congress from 2010 to 2013 and use the passage of the Stop Trading on Congressional Knowledge (STOCK) Act in 2012 as an experiment to examine changes in politicians' trading performance as well as in firm value and outcomes. We find that prior to the STOCK Act, members of the Congress earn significant abnormal returns on their stock trades, and an increase in their holdings of a firm's stock positively predicts the firm's likelihood of being acquired as well as its revenue and earnings surprises. After the passage of the Act, politicians exhibit no such informational advantage in trading or outperformance. On the firms' side, we show that companies with politician ownership on average lose 1.3% in value during the three-day window around the Act's passage, while firms not owned by politicians experience no abnormal returns. Correspondingly, after the Act's passage, these politician-owned firms lose a significant amount of procurement contracts and government grants and become less likely to be selected by the government into high-profile trade missions compared to during the pre-Act period. We find that these mutual benefits are particularly pronounced for politicians who are powerful and firms that are politically active.

Political Determinants of Competition in the Mobile Telecommunication Industry

Mara Faccio
,
Purdue University
Luigi Zingales
,
University of Chicago

Abstract

We study how political factors shape competition in the mobile telecommunication sector. We show that the way a government designs the rules of the game has an impact on concentration, competition, and prices. Pro-competition regulation reduces prices, but does not hurt quality of services or investments. More democratic governments tend to design more competitive rules, while more politically connected operators are able to distort the rules in their favor, restricting competition. Government intervention has large redistributive effects: U.S. consumers would gain $65bn a year if U.S. mobile service prices were in line with German ones and $44bn if they were in line with Danish ones.
Discussant(s)
Dean Lueck
,
Indiana University
Anthony DeFusco
,
Northwestern University
Shane Greenstein
,
Harvard Business School
JEL Classifications
  • G3 - Corporate Finance and Governance