Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market

This paper investigates the rents connected to politically connected firms in banking in Pakistan. Data was collected from 1996 to 2002, and over 90,000 firms were examined. The paper finds politically connected firms borrow more and have higher defect rates than other firms. Preferential treatment occurs only in government banks- private banks typically provide no political favors. The authors also find that the extent to which government banks provide favors depends on the strength of the politician associated with the firm, as well as if the politician's party is in power, and the activity of the politician. The economic costs of these rents as a percentage of GDP are estimated.