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A large body of corporate finance and organizational literature is based on the insight that firms and markets operate differently. One of the most fundamental differences is that resource allocation across establishments within a firm is decided by its headquarters, whereas transactions between separate firms are governed by market mechanisms (Coase 1937).
My research accounts for the democratic favor channel by revisiting seminal research on the effect of democracy on economic growth between 1960 and 2010. After accounting for sanctions on nondemocratic countries, the effect of democracy on economic growth generally becomes insignificant or negative. The effect becomes even weaker or more negative after accounting for the aggressiveness of democracies’ worldwide sanctioning efforts.
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