Do Political Connections Reduce Job Creation? Evidence from Lebanon

Abstract

Using firm-level census data and the 2009 parliamentary elections episode, we show that sectors that include politically connected firms (PCFs) in Lebanon create less jobs compared to otherwise similar sectors with no connected firms. At the same time, we find that politically connected firms create more jobs than otherwise similar non-politically connected firms. We argue that these findings suggest that PCFs are used for clientelistic purposes in Lebanon, exchanging privileges for new jobs that benefit their patrons’ supporters. We also show that the existence of PCFs in a sector reduces net job creation by reducing sharply the growth of non-PCFs. All these effects were larger during the 2009 election year. Based on several pieces of evidence, we argue that the most likely explanation of this phenomenon is that unfair competition by PCFs hurts their direct competitors and reduces their incentives to invest and innovate.