Market Power and Political Connections

Abstract

We quantify the importance of political connections with congressional committee members on firm market power in the United States. For identification, we exploit a congressional procedure (committee exile) leading to variations in a committee member’s political influence. We find that on average 10% more political connections with important committee members increase firm-level markups by 0.58 percentage point, or profitability by 0.45 percentage point among U.S. public firms. The effect can be explained by lower competition for government procurement contracts. We show that the increase in political connections can explain 15-20% of the increase in average markups over 1993-2014. To disentangle the effects of the increase in political connections on the increasing markups of large firms, we propose and estimate a general equilibrium model with oligopolistic output markets and two final goods: public and private final goods. Overall, our paper reveals the increase in corporate political connections serve as a key mechanism in the rise of market power of large firms in the United States.