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The rise of a network: Spillover of political patronage and cronyism to the private sector

Cited 5 time in Web of Science Cited 7 time in Scopus
Authors

Moon, Terry; Schoenherr, David

Issue Date
2022-09
Publisher
ELSEVIER SCIENCE SA
Citation
JOURNAL OF FINANCIAL ECONOMICS, Vol.145 No.3, pp.970-1005
Abstract
We document that networks that gain access to political power and use it for patronage appointments also gain control over resource allocation in the private sector. Specifically, following a presidential election in Korea, the president appoints members of his network into important positions in government, and private banks respond by appointing execu-tives from the same network to establish links to the administration. Consequently, firms linked to the network obtain more credit at a lower rate from government and private banks alike, despite higher default rates. Micro-level data on loans and variation in net-work links for the same firm across lenders over time sharpen the interpretation of our results. In a parsimonious model, we show that efficiency costs are higher when govern-ment and private banks are controlled by the same group rather than different groups: in-group firms invest in more unprofitable projects, whereas out-group firms lack funding for highly profitable investments.(c) 2021 Elsevier B.V. All rights reserved.
ISSN
0304-405X
URI
https://hdl.handle.net/10371/201575
DOI
https://doi.org/10.1016/j.jfineco.2021.09.014
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  • College of Business School
  • Department of Business Administration
Research Area Corporate Finance, Development Economics, Labor Economics

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