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Political Connections and Allocative Distortions
Author(s) -
SCHOENHERR DAVID
Publication year - 2019
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12751
Subject(s) - allocative efficiency , business , procurement , intermediary , government (linguistics) , politics , government procurement , state (computer science) , industrial organization , market economy , finance , microeconomics , economics , marketing , law , linguistics , philosophy , algorithm , political science , computer science
Exploiting a unique institutional setting in Korea, this paper documents that 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.