Favoritism and firms: Micro evidence and macro implications

Asatryan, Zareh ; Baskaran, Thushyanthan ; Birkholz, Carlo ; Gomtsyan, David

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URL: https://madoc.bib.uni-mannheim.de/59713
URN: urn:nbn:de:bsz:180-madoc-597133
Document Type: Working paper
Year of publication: 2021
The title of a journal, publication series: ZEW Discussion Papers
Volume: 21-031
Place of publication: Mannheim
Publication language: English
Institution: Außerfakultäre Einrichtungen > Graduate School of Economic and Social Sciences - CDSB (Business Studies)
Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: D22 , D72 , O43 , R11,
Keywords (English): Regional favoritism , firm performance , enterprise surveys , resource misallocation
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 aggregate output loss of 0.5% annually.

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