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Companies benefit from family ties to local politicians even in low corruption countries, as shown in a study of Denmark by Mario Daniele Amore with Morten Bennedsen. One reason: more business with the public sector

Even in the least corrupt countries family ties to local politicians positively affect the profitability of connected firms, potentially due to a favorable treatment they receive in the allocation of procurement contracts, according to Mario Daniele Amore (Department of Management and Technology) and Morten Bennedsen (INSEAD) in The Value of Local Political Connections in a Low-Corruption Environment, forthcoming in the Journal of Financial Economics..

The two scholars prove their hypothesis studying the case of Denmark (a country consistently at the bottom of corruption rankings) and exploiting the features of the administrative reform of 2005, which merged 238 municipalities into 65 new ones, while leaving unchanged other 33 local governments. The reform arguably raised the power of politicians elected in the new, larger municipalities, having no effect on the power of the ones elected in the unchanged municipalities. Thus the authors compare the results of companies connected to the two groups of politicians before and after the reform in a difference-in-differences approach. Their sample includes the companies with family ties to politicians elected both in 2001 (the last polls before the reform) and in 2005 (after it), where a family tie is represented by a politician being CEO or director of a firm or parent, child, sibling or spouse of a CEO or director.

The evidence shows that a doubling in the power of a politician (in terms of the number of inhabitants per elected politician, expenditures per elected politician, and outsourcing per elected politician) roughly corresponds to a doubling in the profitability of connected firms, as measured by the operating return on assets (OROA), i.e. the ratio of earnings before interest and taxes (EBIT) to the book value of total assets.

Since the performance increase comes also from higher revenues and is greater for firms operating in industries that depend on public demand, the authors argue that "family ties with the political sector help a firm secure more business with local governments". Municipalities in Denmark manage nearly half the total public budget.

Being connected firms less productive than the other Danish firms, their undue success in the public procurement market classifies as a rent reducing the overall welfare.

While previous studies of political connections analyzed highly corrupt countries, where political rent is transferred to companies especially in the form of easier access to bank lending, lower cost of equity and higher likelihood to be bailed out, Amore and Bennedsen show that, even in countries with strong institutions, "doing business with the public sector is an important channel for transferring rent to connected firms".

The scholars conclude highlighting a thought-provoking implication of their study: if a loss of welfare is recorded in the least corrupted countries due to the circumvention of rules and favors to particular firms, maybe it's time to introduce measures of corruption not limited to mere illegality: "Our findings indicate that an appreciable level of legal corruption may be present even in the world's least corrupt country".

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