Sunday, April 23, 2006

The Value of Political Connections

Very wealthy politicians fascinate me. Vast resources give such politicians the opportunity to do what they think is best. They don't have to spend enormous effort raising money and can avoid becoming beholden to fundraisers and/or special interest groups. They may not choose to do this, but, at least, they have the option.

Even the very wealthy, however, have obvious interests, and new research by Mara Faccio suggests that the market expects them to act to further these interests. Companies controlled, owned, or previously run by politicians "experienced a 2.3 percent increase in their share prices, on average, around the time of their electoral victories. If a politician entered the executive branch of government, the effect was larger -- up to a 12 percent lift for companies associated with new presidents, prime ministers and other top officials. " These effects were even larger in countries with high corruption.

This is an interesting way of measuring the returns to social capital. A set of entities (companies) are tied to an individual who rises to a position of influence. This shock increases their social capital. The market suggests that this one form of social capital is quite valuable.

It would be cool to be able to do something similar with individuals. Using longitudinal data on individuals social networks (like how many friends they have and how often they are socializing with them), see how much individuals' popularity increases when they experience a shock to the value of their social connections (e.g., their mom or dad wins an election or the lottery).

You can read a full summary of the research in this NYTimes article.

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