The value of local political connections in a low-corruption environment

We use exogenous changes in Danish local municipality sizes to identify a large positive effect of political power on the profitability of firms related by family to local politicians. Our difference-in-differences estimate is consistent with a unitary elasticity of connected firms' performance to political power (as measured by population per elected politician). Increasing power boosts firms' operating returns, especially in industries relying heavily on public demand. Focusing on arguably the world's least corrupt country, we highlight the importance of corporate rent seeking at local governmental levels, which account for nearly half of total public expenditures. (C) 2013 Published by Elsevier B.V.