Political Connections Cause Resource Misallocation: Evidence from the Fall of Fascism in Italy

The fall of fascism in Italy in 1943-1944 was followed by the issuance of laws and decrees that made former fascist politicians ineligible for political office. We use this setting as a quasi-natural experiment that exogenously disrupted then prevalent corporate political connections. We find that following the exogenous disruption of their political connections, previously politically connected firms underperform their peers. The relative underperformance is both statistically and economically significant. These results imply that political connections lead to misallocation of economic resources because resources allocated to politically connected firms are not allocated to their best uses.