# **1 Introduction**

All over the world, firms exert political influence. While this influence varies in its intensity, form, and effectiveness, it is widely understood to be in competition with the interests of other firms, groups, and the public at large, whether those interests are complementary or adversarial (Becker, 1983). Some of the ways in which firms try to manifest this influence are well established and tested in the economics and political science literature. In particular, the leverage of a connection to political leadership has drawn substantial attention, with most analyses showing large gains to well-connected firms (Fisman, 2001; Faccio, 2006; Malesky and Taussig, 2009; Earle and Gehlbach, 2015). Such connections are not the only means available to firms to exert influence, of course. Firms have many possible interactions with political decision-makers, and each presents a chance for firms to seek gains, but also they give political actors the ability to extract rents from those firms (Shleifer and Vishny, 1994; Harstad and Svensson, 2011; Bertrand et al., 2018; Haber et al., 2003; Markus, 2015; Frye, 2017). That is, while political connections may result in influence, that influence may be dampened or enhanced by particular combinations of political interactions, including through legal channels, such as business associations, or through generally illegal ones, like bribery. Just the same, firms can certainly realize influence without having a political connection. In this paper, we provide an original measure of firm-level political influence for 41 economies, increasing our knowledge about how a diverse array of state-business interactions affect firm performance.

Political influence is a social construct, and so it cannot be directly observed; as such, we treat political influence as a latent concept. This paper uses an original, firm-level data set from 41 diverse economies (mainly in Europe, Central Asia, the Middle East, and North Africa) to understand how firms engage in interactions with public officials to gain influence. To do so, we draw upon data on several interactions between public officials and private firms. We do not start with a prior assumption of which interactions increase political influence, other than through political connections themselves, which we treat as indicative of influence. We use a Bayesian latent variable model, a form of item response theory (IRT), which allows for the aggregation of several indicators of firm political activity along with reported political connections as the reference category. By linking observed combinations of political interactions to the latent concept of influence—and several underlying predictors—we not only show how political connections interact with other engagements between firms and political decision-makers, but we also reveal how certain interactions may complement or temper the influence of those connections. The result is an index, estimated with error, of firm-level Political Influence, which aggregates diverse state-business relationships into a theoretically relevant measure.<sup>1</sup> In Section 2, we lay out a broad framework for understanding how firms may combine their interactions with public officials to garner political influence: we note that drawing political influence through these interactions carries a transactional cost and that the resulting influence is in competition with other

> 1To clarify for readers, we generally capitalize the estimated measure of Political Influence, as opposed to the underlying concept of influence.

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