The Politics of Bailouts: Impact of Political Connections on US Bank Bailouts

• In Event: Political Economy of Political Capture & Corruption

Abstract

If more lobbying and better connections to politicians result in greater benefits in terms of favourable policies and legislation, is it not rational for firms to engage in such activities and be more closely connected to politicians? Being connected to politics can be a useful way for a firm to gain advantage over its competitors. This paper examines the impact of political connections on the allocation of the Troubled Asset Relief Program (TARP) funds for the US finance industry during the 2008-2009 US financial crisis. In order to examine this impact it uses (1) a matching approach to balance the treatment and control groups using the entropy balancing algorithm, (2) a regression discontinuity design to uncover how loses of politicians in close races affect the probability of getting a bailout for a connected firm, and (3) an instrumental variable approach looking at the distribution of foreclosure rates in districts of connected firms that are outside the connected congressmen's district. The paper finds evidence of a positive causal effect of political connections on the distribution of bailout funds in the context of the US financial crisis.

Author

• Vuk Vukovic, University of Oxford