STEG Working Paper Series

Favoritism and Firms: Micro Evidence and Macro Implications

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

FavoritismAndFirms.jpeg

We study the economic implications of regional favoritism, a form of distributive politics that redistributes resources geographically within countries. Using enterprise surveys from low- and middle-income countries, we document that firms located close to leaders' birthplaces grow substantially in sales and employment after leaders assume office. Firms in favored areas also experience increases in sales per worker, wages, and measured total factor productivity. These effects are short-lived, and operate through rising (public) demand for the non-tradable sector. We calibrate a simple structural model of resource misallocation on our estimates. This exercise implies that favoritism reduces output by 0.5% annually.

Related content

STEG Working Paper Series

The Great Upgrade

Alexandros Ragoussis, Jonathan Timmis • Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy
STEG Working Paper Series

Worker Mobility in Production Networks

Marvin Cardoza, Francesco Grigoli, Nicola Pierri, Cian Ruane • Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy
STEG Working Paper Series

Occupational Inheritance in Africa

Nicolas Syrichas • Research Theme 2: Labour, Home Production, and Structural Transformation at the Level of the Household
STEG Working Paper Series

Spatial Production Networks

Costas Arkolakis, Federico Huneeus, Yuhei Miyauchi • Research Theme 1: Firms, Frictions and Spillovers, and Industrial Policy
STEG Working Paper Series

Bureaucratic Nepotism

Juan Felipe Riaño • Research Theme 5: Political Economy and Public Investment