Politically Connected Firms and the Environment

This paper examines the environmental effect of political connections at the individual level and the organizational level. We integrate political connections at both levels and construct a four-stage game theoretical framework to study the political interplay between an entrepreneur, a bureaucrat and a government. We distinguish individual-level political connections from bribery and argue that while the latter is generally more efficient for the firm aiming to reduce environmental tax payment, political connections become more appealing when the bureaucrat places a higher value on indirect non-monetary benefits. We find that individual-level political connections are associated with more emission discharges by the firm, while the effect of organizational-level political connections on emissions depends on the relative magnitude of a negative interaction effect between political connections at different levels and a positive resource-reallocation effect between abatement activities and production.