Connecting to Power: Political Connections, Innovation, and Firm Dynamics

How do political connections affect firm dynamics, innovation, and creative destruction? We extend a Schumpeterian growth model with that help firms ease bureaucratic regulatory burden. The highlights how influence an economy's business dynamism generates number of implications guiding our empirical analysis. construct new large‐scale data set for the period 1993–2014, on universe firms, workers, politicians, complemented corporate financial statements, patent data, election so as to define connected those employing local politicians. identify leadership paradox: market leaders are much more likely be politically connected, but less innovate. Political relate higher rate survival, well in employment revenues, not productivity—a result we also confirm using regression discontinuity design. At aggregate level, gains from offset losses stemming lower reallocation growth.