Essays on Political Connections, Corruption and International Trade

Abstract

The first chapter aims at assessing the importance of political connections for the profitability of privately owned firms. The value of connections is estimated using a unique quasi-natural experiment: The September 2006 Thai coup d’état. Connections are found to be potentially very valuable, accounting for as much as 20% of market capitalization for the best connected firms. Benefits from connections include lower taxation and better access to debt financing. Firms operating in domestically dependent industries and industries with high external financing needs appear to benefit the most from being politically connected. The second chapter incorporates a model of endogenous corruption into an intra industry trade model. The purpose is to study how trade liberalization impacts bureaucratic corruption. We find that trade opening leads to tougher competition and thereby reduces the officials ability to extract rents from firms. We also analyze the incentive for governments to fight corruption and find that incentives are stronger when trade costs are lower. Finally, we empirically test the main prediction of the model, and find that more remote and less easily accessible countries also suffer from higher levels of corruption. The third chapter aims at estimating trade creation and trade diversion under the South Asian Free Trade Agreement (SAFTA). Previous studies - mainly conducted prior to the implementation of the treaty - have put into question SAFTA’s potential for trade creation. However, according to our estimates, conducted on post treaty data, SAFTA has increased intra regional trade by as much as 40% for eligible products. This figure is higher than estimates for most other trade blocks. Further, trade diversion appears to have been limited, though this is due mainly to the treaty being accompanied by significant reductions in external tariffs.