Favoritism and Firms: Micro Evidence and Macro Implications

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.

Regional Favoritism in Access To Credit: Just Believe It

“…They find evidence that firms located in the hometown of the incumbent governor make higher investments. Asatryan et al (2021), employing a worldwide sample, report that firms located in the birth region of political leaders grow in size and become productive. These effects, however, vanish after the leader leaves office.…”

Regional Favoritism and Human Capital Accumulation in Africa

“…Asatryan et al (2021b) study the economic implications of mineral resource activity and finds that leaders' birth regions benefit unlike other non-mining region, but only in autocratic regimes. Asatryan et al (2021a) document that firms located in favored regions are larger in size and are more productive, however these effects hold only in the non-tradeable sector and are temporary. A closely related literature focuses on the mechanisms by which favoritism might be executed, but limits the context to individual countries.…”