Periodic Reporting for period 3 - POLBUSNETWORKS (Political and Business Networks) Reporting period: 2020-05-01 to 2021-10-31 Summary of the context and overall objectives of the project This project studies the role of networks involving firms---networks between firms and politicians, and networks between firms and firms--for economic outcomes. I focus on two broad questions. (1) What are the determinants and mechanisms of political favor networks? (2) What is the impact of business networks on firm and industry performance? The answers can help us understand economic and political differences between firms, industries and countries. In exploring these issues I develop new theories which I then test with new observational and experimental data. Beyond documenting and explaining facts, I also hope to obtain policy implications on protecting political freedoms and improving industry performance in developing countries. Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far In the context of political networks, we have documented two-way favors between the government and the media: advertising favors from the government to connected media, and content favors from connected media to the government. Estimating a model to match these data, we found that much of the observed patterns were driven by favor exchange. We then used the model to investigate what features of the environment mitigate media capture through favor exchange. Our analysis documents a new form of media capture and identifies policies that help protect the freedom of the press.In the context of business networks, in a set of studies we have documented the impacts of business networks on firm and industry performance. In one study we showed that business associations substantially improve the performance of participating firms. In another study we showed that firm networks facilitate the diffusion of information about importing. These results highlight the benefit of policies that improve firm-to-firm interactions. Turning to industry performance, in a third study we documented that access to finance had large positive direct effects on firms, but similarly large negative indirect effects on their competitors due to business-stealing. This finding implies that accounting for indirect network effects is essential to measure societal outcomes, and should influence our thinking on evaluating industrial policies. Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far) In the context of political networks, we further develop the work on media capture by investigating how and why capture generates votes. We first explore how media capture also involves the capture of state-owned firms and media agencies, resulting in control over the entire path of advertising. We then study media content, focusing on how captured media cover the immigration crisis. Finally, we explore the effect of capture on votes. The results are expected to help quantify the economic mechanisms and political implications of media capture.In the context of business networks, we are investigating the impact of suppliers on firm and industry performance. In one study we introduce randomly selected supplier and client firms to an online ecommerce platform, and evaluate the impact of the platform on firm performance and firm-to-firm trade. In a second study we use comprehensive data on firm-to-firm transactions in Hungary to evaluate the impact of supply chain misallocation on industry and aggregate performance. The results are expected to help quantify the economic importance of supply chains, and identify policies that improve firm-to-firm transactions.
