Who Benefits from the Revolving Door? Evidence from Japan

• In Event: Bureaucratic Recruitment and Incentives

Abstract

A growing literature has established the value of legislative connections to firms. Connections to political office holders are associated with boosts in operating profit margins (Blanes i Vidal, Draca and Fons-Rosen 2012; Truex 2014); size of government loans received (Khwaja and Mian 2005); probability of default (Khwaja and Mian 2005); share prices (Faccio 2006); and likelihood of corporate bailout (Faccio, Masulis and McConnell 2006). However, political office is not the only form of government connection firms can leverage. Firms also regularly hire civil servants—a practice commonly referred to as the revolving door. Notably absent from the studies above is an examination of returns to office from these bureaucratic connections.

I use newly collected data that records the first non-bureaucracy position occupied by all former civil servants in Japan to shed light on both the descriptive patterns of employment of former civil servants, as well as examine the impact of revolving door hires on firm-level outcomes such as the size of government loans received, stock price fluctuations, and government contract procurement. My data also reveal a previously overlooked form of revolving door connections—post-government employment in nonprofit organizations (NPOs). I show that over one-third of bureaucrats are re-hired by NPOs, and that these NPOs leverage their bureaucratic connections to increase the size of the government contracts they receive.

Few studies empirically examine returns to firms from revolving door hiring—and those that do derive evidence from convenience samples (Cohen 1986; Gormley Jr 1979;Huntington 1952). By contrast, my approach is comprehensive. I combine new data of all revolving door hires, all government loans to private firms, stock prices of all firms that make high-level bureaucratic hires, and all government contracts with NPOs in Japan over a period of one decade to test for benefits that accrue to organizations who hire former bureaucrats. To locate potential benefits, I conducted dozens of interviews with current and former bureaucrats, business leaders, and NPOs in Japan. These interviews reveal that bureaucratic appointments may be vital to otherwise lower performing firms that receive lifelines through government loans or contracts.

Using various differences-in-differences approaches that account for the negative weighting issues highlighted in recent literature (de Chaisemartin and D’Haultfœuille 2020l; Imai, Kim and Wang 2019; Liu, Wang, and Shu 2021), I find that (1) the volume of government loans received by firms increases in the years following a bureaucratic hire, (2) firms receive stock price boosts following high-ranking bureaucratic hires, and (3) the value of contracts negotiated between government agencies and NPOs are higher in years when former bureaucrats are on staff. Collectively, the qualitative evidence from elite interviews and quantitative evidence above suggest that the practice of hiring former bureaucrats may represent a form of unofficial government assistance to politically-connected organizations.

Author

• Trevor Incerti, University of Amsterdam