The General Equilibrium Effects of Political Connections : the Case of "Moving Umbrellas' in China

We study the general equilibrium effects of firms' political connections, using whether the firm is invested by investors who follow any bureaucratic transfers as a measure of the political connection, as in Shi et al. (2021). We establish several empirical facts, including: (1) Politically connected firms (firms that are connected with "moving umbrellas'') are larger and more productive; (2) Politically connected firms block firm entry, expedite firm exit, and harm the productivity of other firms; (3) Politically connected firms have negative impacts on unconnected firms only; and (4) The impacts of politically connected firms do not exist in the anti-corruption period. We build a model that can explain all these empirical facts, and estimate the model. Eliminating the effects of firms' political connections improves welfare by 3%