Pyramid Capitalism

This paper uses an original database of
469 politically connected firms under the Mubarak regime in
Egypt to explore the economic effects of close
state-business relations. Previous research has shown that
political connections are lucrative. The paper addresses
several questions raised by this research. Do connected
firms receive favorable regulatory treatment? They do:
connected firms are more likely to benefit from trade
protection, energy subsidies, access to land, and regulatory
enforcement. Does regulatory capture account for the high
value of connected firms? In the sample, regulatory capture
as revealed by energy subsidies and trade protection account
for the higher profits of politically connected firms. Do
politically connected firms hurt aggregate growth? The paper
identifies the growth effects of the entry of politically
connected firms by comparing detailed 4-digit sectors where
they entered, between 1996 and 2006, and sectors that
remained unconnected. The entry of connected firms into new,
modern, and previously unconnected sectors slows aggregate
employment growth and skews the distribution of employment
toward less productive, smaller firms.