State capture as market distortion: Effect of political connections in the Czech Republic
|Author:||Mgr. Martin Špolc|
|Year:||2017 - summer|
|Leaders:|| PhDr. Pavel Vacek Ph.D.
|Work type:|| EEI & EP
|Awards and prizes:||M.A. with distinction from the Director of IES FSV UK for an extraordinarily good master diploma thesis.|
|Abstract:||Politically connected firms may extract rent which significantly improves their financial
performance, but with social costs to others in form of market distortions. The thesis presents
the first empirical analysis of personal political connections to government ministers in the
Czech Republic. We estimated value of political connections and inspected subsidies and public
procurements allocation as channels of rent extraction on firm-level data set of 1993-2015
period. For both approaches, cross-section regressions and dynamic matching on covariates
and propensity score, we found that connected firms significantly underperform their similar
rivals, but slightly improve their performance over the time of connection to minister in office.
Connected firms gain significantly more subsidies which confirms subsidy allocation as a
channel of rent extraction. We interpret our results that firms may seek political connections as
the last option how to improve their bad financial results and remain on the market. Biased
subsidy allocation to connected firms in sectors where firms are dependent on subsidies like
agriculture creates market distortions and could lead to significant consumer harm.