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Econ Focus

Fourth Quarter 2014

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Corporations and K Street

Corporations might not spend much on campaigns, but that doesn’t mean they don't care about politics. Economists have found that, particularly in countries lacking strong legal and regulatory systems, firms can receive substantial benefits from having politicians as large shareholders or top officers. Even in the United States, where there are strict rules regarding conflicts of interest, companies may benefit from having political connections. In a 2009 paper, Eitan Goldman of Indiana University, Jorg Rocholl of the European School of Management and Technology, and Jongil So, then at the University of North Carolina at Chapel Hill, found that a U.S. company’s stock price tended to increase when a former politician joined the board of directors. The stock price also increased after the party of a politically connected director gained control of the presidency.

Corporations (and other interest groups) can also try to influence the political process through lobbying.

In theory, lobbying is a way for informed interest groups to share information with uninformed legislators, since it’s not possible for them to be an expert on every issue. But in practice, there may be truth to the belief that lobbying is a way to gain preferential access to politicians. In a 2014 paper, Marianne Bertrand of the University of Chicago and Matilde Bombardini and Francesco Trebbi of the University of British Columbia studied these two different views of lobbying. While they found evidence on both sides, overall, lobbyists appear to be compensated more for their connections than for their expertise.

Whatever the motivation, lobbying is big business. In 2014, organizations spent $3.2 billion on official lobbying. (The Lobbying Disclosure Act of 1995, amended in 2007, requires lobbyists to register and file quarterly reports on their activity). Although official lobbying expenditures and the number of registered lobbyists have declined since the late 2000s, likely as a result of stricter regulations, a significant amount of lobbying activity occurs under other names. Some estimates put the total amount of lobbying, including unofficial lobbying, closer to $9 billion. American University professor of government James Thurber estimates there may be as many as 100,000 unofficial lobbyists, compared to the roughly 12,000 who were registered in 2014.

Lobbying also is concentrated in a relatively small number of organizations. In 2014, just 20 companies and trade associations accounted for 15 percent of the $3.2 billion spent on official lobbying that year. Research by William Kerr of Harvard University, William Lincoln of Johns Hopkins University, and Prachi Mishra of the International Monetary Fund and the Reserve Bank of India has shown that lobbying is highly correlated with firm size, and that the same firms tend to lobby from year to year.

Main Story

Money Talks

Legal changes have opened the door to new kinds of political spending. What does the money buy?

This is not surprising; there are significant upfront costs to lobbying, and smaller firms have fewer resources to employ and would in theory receive a smaller payoff for the same investment. But the concentration may be cause for concern, says Luigi Zingales, an economist at the University of Chicago. "While there is definitely informational value in lobbying, the problem is that over the years the concentration of lobbying interests has increased so that congressmen and women hear only one side of the equation. The system is not balanced."

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