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Political contribution caps and lobby formation: Theory and evidence

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  • Drazen, Allan
  • Limao, Nuno
  • Stratmann, Thomas

Abstract

The perceived importance of "special interest group" money in election campaigns motivates widespread use of caps on allowable contributions. We present a bargaining model in which putting a cap that is not too stringent on the size of the contribution a lobby can make improves its bargaining position relative to the politician, thus increasing the payoff from lobbying. Such a cap will therefore increase the equilibrium number of lobbies when lobby formation is endogenous. Caps may then also increase total contributions from all lobbies, increase politically motivated government spending, and lower social welfare. We present empirical evidence from U.S. states consistent with the predictions of the model. We find a positive effect on the number of PACs formed from enacting laws constraining PAC contributions. Moreover, the estimated effect is nonlinear, as predicted by the theoretical model. Very stringent caps reduce the number of PACs, but as the cap increases above a threshold level, the effect becomes positive. Contribution caps in the majority of US states are above this threshold.
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  • Drazen, Allan & Limao, Nuno & Stratmann, Thomas, 2007. "Political contribution caps and lobby formation: Theory and evidence," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 723-754, April.
    • Handle: RePEc:eee:pubeco:v:91:y:2007:i:3-4:p:723-754
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    Cited by:

    1. Martimort, David, 2019. ""When Olson Meets Dahl": From Inefficient Groups Formation to Inefficient Policy-Making," CEPR Discussion Papers 13843, C.E.P.R. Discussion Papers.
    2. Cartwright, Edward & Patel, Amrish, 2013. "How category reporting can improve fundraising," Journal of Economic Behavior & Organization, Elsevier, vol. 87(C), pages 73-90.
    3. Cotton, Christopher, 2009. "Should we tax or cap political contributions? A lobbying model with policy favors and access," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 831-842, August.
    4. Cotton, Christopher, 2012. "Pay-to-play politics: Informational lobbying and contribution limits when money buys access," Journal of Public Economics, Elsevier, vol. 96(3), pages 369-386.
    5. Ujhelyi, Gergely, 2009. "Campaign finance regulation with competing interest groups," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 373-391, April.
    6. Thomas Stratmann, 2005. "Some talk: Money in politics. A (partial) review of the literature," Public Choice, Springer, vol. 124(1), pages 135-156, July.
    7. Theilen Bernd, 2008. "Lobbying and Contract Delegation in Public Procurement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-35, September.
    8. Cheng Li & Christopher Cotton, 2016. "Clueless Politicians," Working Paper 1341, Economics Department, Queen's University.
    9. Tatyana Chesnokova, 2010. "Lobby Interaction and Trade Policy," School of Economics and Public Policy Working Papers 2010-04, University of Adelaide, School of Economics and Public Policy.
    10. Li, Qing & Liu, Qigui & Ma, Shiguang & Tian, Gary Gang, 2019. "Loan financing and investment in princeling-backed firms," Pacific-Basin Finance Journal, Elsevier, vol. 56(C), pages 71-92.
    11. Christopher Cotton, 2010. "Pay-to-Play Politics: Informational lobbying and campaign finance reform when contributions buy access," Working Papers 2010-22, University of Miami, Department of Economics.
    12. Petrova, Maria & Yildirim, Pinar & Sen, Ananya, 2017. "Social Media and Political Donations: New Technology and Incumbency Advantage in the United States," CEPR Discussion Papers 11808, C.E.P.R. Discussion Papers.
    13. Zudenkova, Galina, 2010. "Sincere Lobby Formation," Working Papers 2072/151545, Universitat Rovira i Virgili, Department of Economics.
    14. Drazen, Allan & Limao, Nuno & Stratmann, Thomas, 2007. "Political contribution caps and lobby formation: Theory and evidence," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 723-754, April.
    15. Schnakenberg, Keith & Turner, Ian R, 2023. "Formal Theories of Special Interest Influence," SocArXiv 47e26, Center for Open Science.
    16. Pastine, Tuvana & Pastine, Ivan, 2006. "Politician Preferences and Caps on Political Lobbying," CEPR Discussion Papers 5913, C.E.P.R. Discussion Papers.
    17. Zudenkova Galina, 2017. "Lobbying as a Guard against Extremism," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(1), pages 1-17, January.
    18. Kim Leonie Kellermann, 2022. "Political inequality, political participation, and support for populist parties," Constitutional Political Economy, Springer, vol. 33(4), pages 461-482, December.
    19. Zudenkova Galina, 2017. "Lobbying as a Guard against Extremism," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 17(1), pages 1-17, February.
    20. Henry L. Friedman & Mirko S. Heinle, 2020. "Influence Activities, Coalitions, and Uniform Policies: Implications for the Regulation of Financial Institutions," Management Science, INFORMS, vol. 66(9), pages 4336-4358, September.
    21. Edward Cartwright & Amrish Patel, 2009. "Does category reporting increase donations to charity? A signalling game approach," Studies in Economics 0924, School of Economics, University of Kent.
    22. Peter Grajzl, 2011. "A property rights approach to legislative delegation," Economics of Governance, Springer, vol. 12(2), pages 177-200, June.

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    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • H0 - Public Economics - - General
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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