Political Connections, Entrepreneurship, and Social Network Investment
Abstract: The recent literature on politically connected firms documents that connections between firms and politicians or political parties is both globally widespread and contributes value to such firms. However, there is little research on how entrepreneurs without direct political access cope with the grabbing hand of government. For entrepreneurs, the source of political influence is usually their social network. We develop a general model linking entrepreneurship, social networks, and political influence. The purpose of the model is to unravel the economic forces behind the trade-offs entrepreneurs face in such an environment and how entrepreneurial choices are altered by changes in the environment on the path to economic development, such as deregulation, market development, and economic growth.