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Working paper

Political Connections and Non-Traditional Investment: Evidence from Public-Private Partnerships in Vocational Education

How do political connections shape the propensity of firms to make investments in weakly institutionalized settings? Traditionally, absent ways to hold the state accountable, firms should withhold investment for fear of predation. An emerging body of work on the political economy of investment has highlighted the competitive advantages that direct political connections with officials can bring to firms in institutionally weak environments with low accountability. These advantages, particularly privileged protection of property rights, can decrease uncertainty and promote investment even absent traditional accountability mechanisms. This paper applies these insights to a particularly risky form of investment for firms: public-private partnerships (PPP) with the state to develop skill. Skill development investments are riskier than average, since they require firms to reveal trade secrets about their production, engage in long-term interactions, and can be poached by free-riding rival firms. This paper argues that these risks can be overcome by a strong state partner (i.e. PPP), albeit this creates new risks in weakly institutionalized environments if the lower-level officials responsible for implementing agreements cannot be held accountable for agreements and can shirk. This paper argues that political connections provide the means for states to create credible commitment, as they give firms access to power that can enable them to monitor lower-level officials, call attention to misbehavior, and thus punish deviations from PPP agreements. It outlines the ways in which various types of political connections state ownership, direct officeholding, employing former officials, via formal consultative organs , and acquaintanceship can enable firms to hold lower-level offi- cials accountable and engender credible commitment. These arguments are then tested using data from an original survey of 690 firms in 12 Russian regions.