Today in my graduate International Political Economy class we discussed how firms influence the political process.

While the US media often focuses on campaign contributions in a quid pro quo exchange with firms, political science has rejected this simple approach.  Even in cases of government contracts (think Halliburton getting billions during the Iraq war) there is limited evidence that politicians trade votes for campaign contributions?

Really?  How come?

First, the empirical evidence simply doesn’t point to this type of exchange.  As documented in this classic paper(and first described by Tullock), there is too little money in politics.  In the last election cycle over $1 billion was spent by special interests.  But compared to $3.5 trillion in government spending or $615 billion in non-defense discretionary spending, political contributions are quite small.

If a company like Walmart could swing government policy, they should be investing millions and millions in campaigns.  They don’t.  They spend hundreds of millions in charitable contributions and advertising, and only thousands in political contributions.

Second, most of the studies cited in this study find very limited evidence of contributions affecting roll call votes.

That was a quick empirical point, but doesn’t explain the theory.  How come money isn’t more influential?  Thispiece by Gordon and Hafter makes three points (focusing specifically on regulation).

1. Reductions in regulations are a collective good for the industry.  Sure, chemical companies want looser environmental laws, but the lobbying by a single firm could provide the good for everyone.  The collective action problem means that this actually makes it less likely for this to be provided.
2. There is a classic problem of credible commitments.  A politician gets thousands of campaign contributions from a firm with the promise that the politician will shield the firm in the unlikely event of an environmental disaster.  The disaster strikes and then politicians run away from the firm.  Let’s call this example Congress and BP Deepwater Horizon.
3. More generally, politicians are getting campaign contributions to help win elections.  If the positions politicians have to take to get these contributions are unpopular, this can defeat the purpose of getting the contributions in the first place.

These are probably obvious points to most my reader(s), but worth noting.  Most firms invest more in crappy corporate art and definitely much, much more in advertising than in political contributions.  Why?  Because of collection action problems and that you can’t trust those lying politicians.

I don’t want to go too far.  The above cited Gordon and Hafter piece is an excellent study of how contributions can be used influence politics.  But the point is that contributions may matter, but they are not the main way that firms influence politics.

Years ago I had a MBA student in one of my Ph.D. classes.  His answer to these sort of questions was always something like, “why don’t you just ask the firms.”  One recent paper did something along these lines, by examining 250,000 Enron emails to see how important contributions were as a political strategy.  The quick point is that they aren’t very important in general (summary link).

Contributions have minimal influence, but firms can influence politics in other way.  Let me outline one quick mechanism. Work such as Eddy Malesky’s research on Vietnam show that foreign investment, by generating jobs and tax revenues, is supported by local elites.  Local are willing to bend or break central government rules for investors for these benefits.

Related work includes Pinto and Pinto’s study of how the industry of investment matters for politicians. Left politicians, favoring labor, will enact policies that will help encourage investment in labor intensive industries, while right politicians, representing capital, will represent capital intensive industries.

Finally, work by Facco and co-authors documents “politically connected firms”.  In most cases these are firms where executives or board members of a firm are also politicians.

What doe these three studies have in common?  In all three of them, politicians have strong incentives for certain firms to do well.  Politicians are willing to champion these firms, either because they affect an important constituency, or that they directly impact a politicians own asset performance.

These are just a couple of quick points from a single week of my grad IPE class.  Thought I would share.