In all modern bureaucracies, politicians retain some discretion in public employment decisions, which may lead to frictions in the selection process if political connections substitute for individual competence. Relying on detailed matched employer-employee data on the universe of public employees in Brazil over 1997–2014, and on a regression discontinuity design in close electoral races, we establish three main findings. First, political connections are a key and quantitatively large determinant of employment in public organizations, for both bureaucrats and frontline providers. Second, patronage is an important mechanism behind this result. Third, political considerations lead to the selection of less competent individuals. (JEL D72, D73, J45, O17)

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We study the capture of higher education by the Pinochet dictatorship following the 1973 military coup in Chile. We show that the regime’s twin aims of political control and fiscal conservatism led to a large contraction of all universities in the country, mostly through a steady reduction in the number of openings for incoming students. As a result, individuals that reached college age in the years immediately after the military coup experienced a sharp decline in college enrollment. These individuals had worse labor market outcomes throughout the life cycle and struggled to climb up the socioeconomic ladder. Children with a parent in the affected cohorts are themselves less likely to enroll in university, even after democratization. These findings illustrate the relationship between political regimes, redistributive policies and social mobility. They also shed light on the long-lasting effects of the reform agenda implemented under Pinochet.

The views expressed herein are those of the authors and do not necessarily reflect the views of the Latin American and the Caribbean Economic Association. Research published in this series may include views on policy, but LACEA takes no institutional policy positions.LACEA working papers are circulated for discussion and comment purposes. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author.

We study the inner workings of internal capital markets during the 2008–09 recession using a unique dataset of loans between business group firms in an emerging market. Intragroup loans increase quickly during the recession. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Acting like simple intermediaries, central firms do not increase net lending. Our results imply that formal control rights are essential for intermediation in internal capital markets, particularly during distress. In line with previous results on winner-picking, receivers of intragroup loans are high-Q, financially constrained firms, which also perform significantly better than providers during the recession.

Using rich micro-data from Brazil, we show that multiple machine learning models display high levels of performance in predicting municipality-level corruption in public spending. Measures of private sector activity, financial development, and human capital are the strongest predictors of corruption, while public sector and political features play a secondary role. Our findings have implications for the design and cost-effectiveness of various anti-corruption policies.

We use new firm-level data from Chile to document resource misallocation in favor of politically connected firms during the transition from dictatorship to democracy. We find that firms with links to the Pinochet regime (1973)(1974)(1975)(1976)(1977)(1978)(1979)(1980)(1981)(1982)(1983)(1984)(1985)(1986)(1987)(1988)(1989)(1990) were relatively unproductive and benefited from resource misallocation under dictatorship, and those distortions persisted into democracy. We show that, after learning that the dictatorship was going to end, firms in the dictator's network increased their productive capacity, experienced higher profits, and obtained more loans from the main state-owned bank. We test for different explanations and provide suggestive evidence consistent with connected firms aiming to shield their market position for the transition to democracy.