Saturday, May 29, 2010

The impact of federal spending on local business:
Our original goal was to investigate how politically connected firms benefit from increases in the power of their representatives. A benefit in focusing on changes in committee chairmanships is that their timing is largely exogenous from the perspective of the ascending chairman and his constituents...

We began by examining how the average firm in a chairman's state was impacted by his ascension. The idea was that this would provide a lower bound on the benefits from being politically connected. It was an enormous surprise, at least to us, to learn that the average firm in the chairman's state did not benefit at all from the increase in spending. Indeed, the firms significantly cut physical and R&D spending, reduce employment, and experience lower sales.

The results show up throughout the past 40 years, in large and small states, in large and small firms, and are most pronounced in geographically concentrated firms and within the industries that are the target of the spending.
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