Investing in influence: Investors, portfolio firms, and political giving
(with Marianne Bertrand, Raymond Fisman, Francesco Trebbi and Eyub Yegen)
Campaign finance laws aim to limit an individual's influence over the political process. We show that corporate ownership may be an important mechanism by which institutional investors circumvent such constraints and amplify their influence. Using data on the political giving and ownership of all 13-F investors between 1980 and 2018, we show that the probability that a firm's Political Action Committee (PAC) donates to a politician supported by an investor's PAC nearly doubles after the investor acquires a large stake, and that it increases five-fold when the investor obtains a board seat. This increase in similarity of political giving coincides with the election cycle the acquisition takes place in, and is not driven by selection into specific politically strategic acquisitions, as convergence in political behavior is observed even for exogenously determined acquisitions caused by stock index inclusions. The relationship is stronger for private funds, and those with high partisanship, suggesting the relationship is driven by investor preferences rather than strategic concerns. Finally, we show that portfolio firms' PAC expenditure experiences a relatively large shift at the acquisition date relative to past giving, whereas no such pattern is observed for institutional investors. We argue that these findings are best explained by investors influencing portfolio firm giving, suggesting that PAC giving may be another means by which influential shareholders impact corporate decision-making, in a manner that amplifies investors' political voice.
Hall of Mirrors: Corporate Philanthropy and Strategic Advocacy
(with Marianne Bertrand, Ray Fisman, Brad Hackinen, and Francesco Trebbi)
Quarterly Journal of Economics, Revise and Resubmit.
Information is central to designing effective policy and policymakers often rely on competing interests to separate useful from biased information. In this paper we show how this logic of virtuous competition can break down, using a new and comprehensive dataset on U.S. federal regulatory rulemaking for 2003-2016. For-profit corporations and non-profit entities are active in the rule-making process and are arguably expected to provide independent viewpoints. Policymakers, however, may be less than fully aware of the financial ties between some firms and non-profits – grants that are legal and tax-exempt, but hard to trace. We document three patterns which suggest that these grants may distort policy. First, we show that, shortly after a firm donates to a non-profit, that non-profit is more likely to comment on rules on which the firm has also commented. Second, when a firm comments on a rule, the comments by non-profits that recently received grants from the firm’s foundation are systematically closer in content to the firm’s own comments, relative to comments submitted by other non-profits. Third, the final rule’s discussion by a regulator is more similar to the firm’s comments on that rule when the firm’s recent grantees also commented on it. We discuss two interpretations of the evidence. While the negative welfare consequences of a “comments-for-sale” scenario are immediate, we show that, even if corporate grants’ only effect is to relax the grantee’s budget constraint, this can also lead to distorted policy making.
How the Breadth and Depth of Import Relationships Affect the Performance of Canadian Manufacturers
(with Keith Head, Maria Tito and Ruoying Wang)
Canadian Journal of Economics, Revise and Resubmit.
This paper examines the relationship between a manufacturing firm's import behaviour and its performance. The focus is on two aspects of imports, input variety and the dynamics of import relationships. Firms importing more products from a larger set of suppliers tend to be larger, more productive and more successful in export markets. Not only the number, but also the duration of supply relationships matter. Firms maintaining a higher share of continuous supply relationships also benefit from size and productivity effects. These results suggest that the breath and depth of the import network are relevant factors for the performance of Canadian manufacturers. An unexpected result for a control variable merits further investigation. Namely, we find that more extensive use of Chinese suppliers is associated with inferior export performance. Our breadth and depth results underscore the importance of trade liberalization with new partners and trade facilitation with our established sources of suppliers.
Gains from Distortions in Congested City Networks
(with Francesco Trebbi)
This paper presents a model and an automated methodology for assessing gains from network distortions in cities. Distortions arise from excluding traffic along certain routes. Distortions degrade network connectivity, but can be paradoxically useful for congestion amelioration. We show that such distortions are quantitatively large, increasingly pervasive in larger cities, and potentially very valuable. The results ultimately support the view that Braessí(1968) paradox is not just a theoretically interesting possibility, but a widespread feature of city road networks.
How Robust is the Skill-Dispersion Complementarity Hypothesis?
(with Giovanni Gallipoli and Germán Pupato)
We explore the robustness of the hypothesis, first put forward by Grossman and Maggi (2000) (GM), that countries with higher skill dispersion specialize in the sector characterized by a submodular production function, i.e. the industry that cross-matches workers of different skills (henceforth referred to as SDC hypothesis). We relax the assumption of constant returns to skill, breaking the link between submodularity and the concavity of isoquants, a key feature in GM. We show that when a submodular sector displays convex isoquants, it no longer benefits from higher skill dispersion and higher skill dispersion countries may specialize in the supermodular sector. We investigate this theoretical possibility by performing a variety of simulations, based on empirical skill distributions, and find that in the vast majority of cases the SDC hypothesis is not violated.
Empirical Models of Lobbying
(with Francesco Trebbi)
Annual Review of Economics, August 2020, 12: pp.391-413.
This paper offers a review of the recent empirical literature on lobbying within Political Economy. In surveying extant evidence, we emphasize quid-pro-quo and informational issues in special interest politics and we highlight crucial open research questions in both. The main unresolved methodological issues remain how to properly account for the impact of lobbying on which equilibrium policies are chosen and advanced, and on how distorted those equilibrium policies might be relative to the interests of the general public. Of the principal open questions within political economy, a comprehensive quantitative assessment of the welfare distortions of lobbying remains one of the most elusive.
Did the rapid expansion of Chinese exports between 1990 and 2010 contribute to the country's worsening environmental quality? We exploit variation in the local industrial composition to gauge the effect on pollution and health outcomes of export expansion due to the decline in tariffs faced by Chinese exporters. We construct two export shocks at the prefecture level: (i) PollutionExportShock represents the pollution content of export expansion; (ii) ExportShock measures export expansion in dollars per worker. The two measures differ because prefectures specialize in different products: while two prefectures may experience the same shock in dollar terms, the one specializing in “dirty” industries has a larger PollutionExportShock. We find that the pollution content of exports affects pollution and mortality. A one standard deviation increase in PollutionExportShockincreases infant mortality by 2.7 deaths per thousand live births, which is about 18% of the standard deviation of infant mortality change during the period. The dollar value of export expansion reduces mortality by 0.7 deaths, but the effect is not statistically significant. We show that the channel through which exports affect mortality is pollution concentration. We find a negative, but insignificant effect on pollution of the dollar-value export shocks, a potential “technique” effect whereby higher income drives demand for clean environment. We find that only infant mortality related to cardio-respiratory conditions responds to exports shocks, while deaths due to accidents and other causes are not affected.
Tax-Exempt Lobbying: Corporate Philanthropy as a Tool for Political Influence
(with Marianne Bertrand, Ray Fisman, and Francesco Trebbi) [data and materials]
American Economic Review, July 2020, 110(7): pp.2065-2102.
We analyze the role of charitable giving as a means of political influence, a channel that has been heretofore unexplored in the political economy literature. For philanthropic foundations associated with Fortune 500 and S&P500 corporations, we show that grants given to charitable organizations located in a congressional district increase when its representative obtains seats on committees that are of policy relevance to the firm associated with the foundation. This pattern parallels that of publicly disclosed Political Action Committee (PAC) spending. As further evidence on firms’ political motivations for charitable giving, we show that a member of Congress’s departure is associated with a short-term decline in charitable giving to his district, and we again observe similar patterns in PAC spending. Charities directly linked to politicians through personal financial disclosure forms filed in accordance with Ethics in Government Act requirements similarly exhibit patterns that are consistent with political dependence. Our analysis suggests that firms may deploy their charitable foundations as a form of tax-exempt influence seeking. Based on a stylized model of political influence, our most conservative estimates imply that around 7 percent of total U.S. corporate charitable giving can be interpreted as politically motivated, an amount that is economically significant: it is 2.5 times larger than annual PAC contributions and about 36 percent of total federal lobbying expenditures. Given the lack of formal electoral or regulatory disclosure requirements, charitable giving may be a form of political influence that goes mostly undetected by voters and shareholders, and which is subsidized by taxpayers.
Does Exporting Improve Matching? Evidence from French Employer-Employee Data
(with Gianluca Orefice and Maria D. Tito)
Journal of International Economics, March 2019, 117: pp.229-241.
This paper documents a novel fact about the hiring decisions of exporting firms versus non-exporting firms in a French matched employer-employee dataset. We construct the type of each worker using both a traditional wage regression and a theory-based approach and compute measures of the average worker type and worker type dispersion at the firm level. We find that exporting firms feature a lower type dispersion in the pool of workers they hire. This effect is quantitatively larger than the common finding in the literature that exporters pay higher wages because, among other factors, they employ better workers. The matching between exporting firms and workers is even tighter in sectors characterized by better exporting opportunities as measured by foreign demand or tariff shocks. Our findings are consistent with a model of matching between heterogeneous workers and firms in which variation in the worker type at the firm level exists in equilibrium only because of the presence of search costs. When firms gain access to the foreign market, matching with the right worker becomes particularly important because deviations from the ideal match quickly reduce the higher potential value of the relationship. Hence, exporting firms select sets of workers that are less dispersed relative to the average. This analysis is suggestive of the presence of additional gains from trade due to improved sorting.
Is It Whom You Know or What You Know? An Empirical Assessment of the Lobbying Process
(with Marianne Bertrand and Francesco Trebbi) [online appendix] [data and materials]
American Economic Review, December 2014, 104(12): pp.3885-3920.
Do lobbyists provide issue-specific information to members of Congress? Or do they provide special interests access to politicians? We present evidence to assess the role of issue expertise versus connections in the US Federal lobbying process and illustrate how both are at work. In support of the connections view, we show that lobbyists follow politicians they were initially connected to when those politicians switch to new committee assignments. In support of the expertise view, we show that there is a group of experts that even politicians of opposite political affiliation listen to. However, we find a more consistent monetary premium for connections than expertise.
Unobservable Skill Dispersion and Comparative Advantage
(with Giovanni Gallipoli and Germán Pupato)
Journal of International Economics, March 2014, 92(2): pp.317-329.
This paper develops a tractable multi-country, multi-sector model of international trade with unobservable skills and search frictions in the labour market. Comparative advantage derives from (i) cross-sectoral differences in the substitutability of workers’ skills and (ii) cross-country differences in the dispersion of skills in the working population. We establish the conditions under which higher skill dispersion triggers specialization in sectors characterized by higher substitutability of skills across workers.
Risk Aversion and Expected Utility Theory: An Experiment with Large and Small Stakes
(with Francesco Trebbi)
Journal of the European Economic Association, December 2012, 10(6): pp.1348-99.
We employ a novel data set to estimate a structural econometric model of the decisions under risk of players in a game show where lotteries present payoffs in excess of half a million dollars. Differently from previous studies in the literature, the decisions under risk of the players in presence of large payoffs allow to estimate the parameters of the curvature of the vN-M utility function not only locally but also globally. Our estimates of relative risk aversion indicate that a constant relative risk aversion parameter of about one captures the average of the sample population. In addition we find that individuals are practically risk neutral at small stakes and risk averse at large stakes, a necessary condition, according to Rabin (2000) calibration theorem, for expected utility to provide a unified account of individuals’ attitude towards risk. Finally, we show that for lotteries characterized by substantial stakes non-expected utility theories fit the data equally well as expected utility theory.
Is skill dispersion a source of comparative advantage? In this paper we use microdata from the International Adult Literacy Survey to show that the effect of skill dispersion on trade flows is quantitatively similar to that of the aggregate endowment of human capital. In particular we investigate, and find support for, the hypothesis that countries with a more dispersed skill distribution specialize in industries characterized by lower complementarity of workers’ skills. The result is robust to the introduction of controls for alternative sources of comparative advantage, as well as to alternative measures of industry-level skill complementarity.
Competition and Political Organization: Together or Alone in Lobbying for Trade Policy?
(with Francesco Trebbi)
Journal of International Economics, May 2012, 87(1): pp.18-26.
This paper employs a novel data set on lobbying expenditures to measure the degree of within-sector political organization and to explore the determinants of the mode of lobbying and political organization across U.S. industries. The data show that sectors characterized by a higher degree of competition tend to lobby more together (through a sector-wide trade association), while sectors with higher concentration and more differentiated products lobby more individually. The paper proposes a theoretical model to interpret the empirical evidence. In an oligopolistic market, firms can benefit from an increase in their product-specific protection measure, if they can raise prices and profits. They find it less profitable to do so in a competitive market where attempts to raise prices are more likely to reduce profits. In competitive markets firms are therefore more likely to lobby together, thereby simultaneously raising tariffs on all products in the sector.
Firm Heterogeneity and Ricardian Trade: the Impact of Domestic Competition on Export Performance
(with Christopher Kurz and Peter Morrow) [online appendix]
Canadian Journal of Economics, May 2012, 45(2): pp.585-612.
This paper develops and empirically examines a model of relative productivity differences both within and across industries for small open economies. We decompose the effect of industry productivity on export performance into direct effect of own firm productivity and an indirect effect of higher peer firm productivity. In a sample of Chilean and Colombian plants, we find evidence of both a positive direct effect and a negative indirect effect. The empirical evidence supports our theoretical prediction that industry-specific factors of production and asymmetric substitutability between domestic and foreign varieties drive the negative indirect effect.
Votes or Money? Theory and Evidence from the US Congress
(with Francesco Trebbi)
Journal of Public Economics, August 2011, 95(7-8): pp.587-611.
This paper investigates the relationship between the size of interest groups in terms of voter representation and the interest group’s campaign contributions to politicians. We uncover a robust hump-shaped relationship between the voting share of an interest group and its contributions to a legislator. This pattern is rationalized in a simultaneous bilateral bargaining model where the larger size of an interest group affects the amount of surplus to be split with the politician (thereby increasing contributions), but is also correlated with the strength of direct voter support the group can offer instead of monetary funds (thereby decreasing contributions). The model yields simple structural equations that we estimate at the district level employing data on individual and PAC donations and local employment by sector. This procedure yields estimates of electoral uncertainty and politicians effectiveness as perceived by the interest groups. Our approach also implicitly delivers a novel method for estimating the impact of campaign spending on election outcomes: we find that an additional vote costs a politician on average 145 dollars.
Firm Heterogeneity and Lobby Participation
Journal of International Economics, July 2008, 75(2): pp.329-348.
The structure of protection across sectors has been interpreted as the result of competition among lobbies to influence politicians, but lobbies have been treated as unitary decision makers and little attention has been devoted to the importance of individual firms in this process. This paper builds a model where individual firms determine the amount of resources to allocate to political contributions and shows that, in the presence of a fixed cost of channeling political contributions, it is efficient for a lobby to be formed by the largest firms in a sector. Therefore the size distribution of firms plays an important role: sectors with a higher share of firms above a given size exhibit higher intensity of political activity. This prediction is borne out by the data: industries characterized by higher firm size dispersion obtain a higher level of protection. The model is also tested against the leading "Protection for Sale" paradigm, employing a newly matched data set on firm-level political contributions. The empirical evidence shows that, accounting for individual firm behavior, the model explains a larger fraction of the variation of protection across sectors.