Power, Scrutiny, and Favoritism for Friends' Firms: Evidence from Close Congress Elections
Abstract: Does more political power always lead to more favoritism? The literature's usual affirmative answer overlooks the role of scrutiny in shaping the pattern of favoritism over the ladder of power. When a higher-powered position comes with much tighter scrutiny, a politician reaching this position may reduce his quid-pro-quo favors towards connected firms for fear of jeopardizing his career prospect. We find robust RDD-based evidence of this adverse effect among candidates in close elections to the U.S. Congress and firms whose directors are their former classmates. A politician's election to Congress, compared with a defeat, reduces the stock value of his friend's firm by 2.8% within a week. Consistent with our theoretical predictions, this adverse effect varies in response to cross-state scrutiny levels, politicians' power to give favor, and connection strength. It is prevalent in politicians' earlier career, when career concerns are more important, and changes to a value gain in the later stage of their career.
