Political Determinants of Economic Exchange: Evidence from a Business Experiment in Senegal

The forthcoming article “Political Determinants of Economic Exchange: Evidence from a Business Experiment in Senegal” by Abhit Bhandari is summarized by the author below. 

In much of the world, who one knows can make a critical difference in the private sector. Where institutional access is difficult and rule of law selectively enforced, the advantages of political connections are especially pronounced. Among other benefits, knowing the right people in power can make it easier to enforce deals against partners who have broken contracts, or make it easier to break contracts without fear of retribution. 

Scholars tend to focus on the value of political connections. But there could be a downside: given that the politically connected can break deals with relative impunity, people may resist doing business with politically connected firms. And within this context of valuable political connections, state institutions like formal, written contracts may be susceptible to similar biases. I advance a theory in this paper arguing that political connections suppress everyday exchange and that formal contracts disproportionately protect the politically powerful. 

It has been difficult to causally test these arguments in the past. Most available data only records exchanges that have already occurred or firms that already exist. But if political connections can indeed prevent exchanges from occurring where they otherwise might, relying on such data could mischaracterize the true impact of political connections and contracts on exchange. 

To estimate this causal impact, I implemented a field experiment in Senegal in which I created and operated a registered business that sold mobile phone credits to households. I formed partnerships with three municipal councils in Dakar, and hired a team of employees who then worked at these councils in order to develop their political connections. Then, during door-to-door transactions, I randomized whether employees signaled their political connections as well as whether they offered formal contracts as part of the deal. This strategy allowed me to observe the conditions under which buyers exchange, and, critically, when they do not. 

The results show that, on average, political connections suppressed exchange and formal contracts boosted exchange. The effects of formal contracts are particularly large, an encouraging yet somewhat surprising result given Senegal’s weak contracting environment. However, examining the results by buyers’ political connections shows that it was primarily politically connected buyers who increased their likelihood of exchange when formal contracts were part of the deal. Imbalances in the political connections of buyers and sellers similarly affected who did business with whom: while sellers’ political connections decreased the likelihood of purchase among connected buyers, they had no effect among unconnected buyers who purchased at lower rates in general. 

Overall, these results show that everyday political connections can impede daily types of trade. This paper thus demonstrates the importance of measuring individual-level political connectivity for understanding patterns of economic development when the rule of law is selectively enforced. 

These results also demonstrate the limits of state institutions for enforcing secure exchange. Though formal contracts increase confidence in exchange, when rule of law is selectively enforced, these benefits may only accrue to those who need it the least: politically connected parties. Increasing access to formal contracts absent structural reforms may thus unintentionally exacerbate existing inequality and segmentation. 

This study was among the first to create a legal business to test a core question in the political economy literature, a strategy which offers unprecedented control to researchers. Assuming ethical standards can be met, this approach could be refined and adapted to other contexts to test lingering causal questions in the study of business and politics. 

About the Author: Abhit Bhandari, Postdoctoral Research Fellow at University of Toulouse Capitole. Their research “Political Determinants of Economic Exchange: Evidence from a Business Experiment in Senegal” is now available in Early View and will appear in a forthcoming issue of the American Journal of Political Science. 

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The American Journal of Political Science (AJPS) is the flagship journal of the Midwest Political Science Association and is published by Wiley.

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