IPconnect · Industrial Policy and Corporate Connections

The recent rise of industrial policy (IP) worldwide is reshaping the role of the state in the economy. A key challenge for industrial policy is to involve industrial groups in policymaking and implementation without allowing them to dominate the process. The main objective of this project is to study whether corporate connections of bureaucrats are beneficial or detrimental to the design of IP with the specific objective to promote private capital transfer from one region to another. This project leverages one of the largest state-led investment programs in recent history, employing quasi-experimental methods to credibly estimate causal effects in combination with high quality administrative data. It studies the German Treuhand agency that sought to transform East Germany’s troubled state-owned enterprises suffering from low labour and energy productivity in the wake of the German reunification. The agency’s leaders, recruited from West Germany’s business elite, were tasked with attracting Western capital. However, their close connections to West German businesses raised concerns about potential conflicts of interest.This project evaluates the effectiveness of the regional capital flow through connections, first, by assessing the performance of firms acquired by connected and unconnected investors. Second, drawing on detailed data on sales contracts, the project estimates the effect of connections on transaction outcomes. Third, it assess the impact on connections on the performance of corporate investors that participated in the large-scale investment program. The project's findings will be pertinent for the design of institutional policies around the avoidance of conflicts of interest in industrial policy.