Political Connections and Allocative Distortions

59 Pages Posted: 14 Aug 2014 Last revised: 12 Jan 2018

See all articles by David Schoenherr

David Schoenherr

Princeton University, Bendheim Center for Finance; European Corporate Governance Institute (ECGI)

Date Written: January 8, 2018


Exploiting a unique institutional setting in Korea, this paper documents how 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.

Keywords: allocative efficiency, political connections, public procurement, rent-seeking, social networks

JEL Classification: D61, D72, G30, H57

Suggested Citation

Schoenherr, David, Political Connections and Allocative Distortions (January 8, 2018). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2480261 or http://dx.doi.org/10.2139/ssrn.2480261

David Schoenherr (Contact Author)

Princeton University, Bendheim Center for Finance ( email )

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Princeton, NJ 08540
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels

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