Rent Provisions

Abstract

Corruption by the politically connected is often blamed for economic ills, particularly in less developed economies. Using a loan-level data set of more than 90,000 Örms that represents the universe of corporate lending in Pakistan between 1996 and 2002, we investigate rents to politically connected Örms in banking. Classifying a Örm as ìpoliticalîif its director participates in an election, we examine the extent, nature, and economic costs of political rent provision. We Önd that political Örms borrow 45 percent more and have 50 percent higher default rates. Such preferential treatment occurs exclusively in government banks - private banks provide no political favors. Using Örm Öxed e§ects and exploiting variation for the same Örm across lenders or over time allows for cleaner identiÖcation of the political preference result. We also Önd that political rents increase with the strength of the Örmís politician and whether he or his party is in power,