Political Connections, Entrepreneurship, and Social Network Investment

Abstract: The recent literature on politically connected firms documents that connections between firms and politicians or political parties are both globally widespread and contribute value to such firms. However, there is little research on how entrepreneurs without direct political access cope with the grabbing hand of government. For entrepreneurs, the source of political influence is usually their social network. We develop a general model linking entrepreneurship, social networks, and political influence. The practices and patterns that motivate our model are widespread in many emerging economies in Asia, Latin America, and the Middle East. One of the best documented examples in the academic literature comes from Jordan. We justify our modeling assumptions by discussing in detail how "wasta" works in Jordan and its impact on the business climate. The model unravels the economic forces behind the trade-offs entrepreneurs face in such environments and how entrepreneurial choices are altered by changes in the environment on the path to economic development, such as deregulation, market development, and economic growth.