Renting Elected Office

Why do some businesspeople run for political office, while others do not? Sending directors into elected office is one of the most powerful but also resource-intensive ways firms can influence policymaking. Although legislative bodies are populated with businesspeople in countries worldwide, we know little about which firms decide to invest in this unique type of nonmarket strategy. In response, I argue that businesspeople run for elected office when (1) they cannot trust that the politicians they lobby will represent their interests and (2) their firms have the resources available to contest elections. My theory predicts the probability of politician shirking (reneging on their promises) depends on whether rival firms have representatives in parliament and political parties are capable of enforcing informal quid pro quo agreements. Evidence to test my arguments comes from an original dataset of 8,829 firms connected to candidates to regional legislatures in Russia from 2004-2011. I find that both greater oligopolistic competition and weaker political parties incentivize businessperson candidacy, while the ability to cover campaign costs depends on the level of voter income and firm size. Do firms with directors holding elected political office then benefit from political connections? Using the same dataset but restricting the analysis to elections in single-member districts, I next employ a regression discontinuity design to identify the causal effect of gaining political ties, comparing outcomes of firms that are directed by candidates who either won or lost close elections to regional legislatures. I first find that a connection to a winning politician can increase revenue by roughly 60% and profit margins by 15% over their time in office. I then test between different mechanisms potentially explaining the results, finding that connected firms improve their performance by gaining access to bureaucrats and reducing information costs, and not by signaling legitimacy to financiers. Finally, winning a parliamentary seat is more valuable for firms where democratization is greater, but less valuable when firms face acute sector-level competition. This finding suggests that the intensity of economic rivalry, rather than the quality of political institutions, best explains the decision to send a director into public office.