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Political Contribution Caps and Lobby Formation: Theory and Evidence

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  • Allan Drazen
  • Nuno Limão
  • Thomas Stratman

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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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10928.

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Date of creation: Nov 2004
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Handle: RePEc:nbr:nberwo:10928

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  1. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  2. Prat, A., 1997. "Campaign Advertising and Voter Welfare," Discussion Paper 1997-118, Tilburg University, Center for Economic Research.
  3. Che, Yeon-Koo & Gale, Ian L, 1998. "Caps on Political Lobbying," American Economic Review, American Economic Association, vol. 88(3), pages 643-51, June.
  4. Allan Drazen & Nuno Limão, 2004. "Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution," NBER Working Papers 10375, National Bureau of Economic Research, Inc.
  5. Stephen Coate, 2004. "Pareto-Improving Campaign Finance Policy," American Economic Review, American Economic Association, vol. 94(3), pages 628-655, June.
  6. Allan Drazen & Nuno Limão & Thomas Stratman, 2004. "Political Contribution Caps and Lobby Formation: Theory and Evidence," NBER Working Papers 10928, National Bureau of Economic Research, Inc.
  7. Stratmann, Thomas, 1998. "The Market for Congressional Votes: Is Timing of Contributions Everything?," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 85-113, April.
  8. Stephen Ansolabehere & John M. de Figueiredo & James M. Snyder Jr, 2003. "Why is There so Little Money in U.S. Politics?," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 105-130, Winter.
  9. Stephen Ansolabehere & John M. de Figueiredo & James M. Snyder, 2003. "Why Is There So Little Money in Politics?," NBER Working Papers 9409, National Bureau of Economic Research, Inc.
  10. Trefler, Daniel, 1993. "Trade Liberalization and the Theory of Endogenous Protection: An Econometric Study of U.S. Import Policy," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 138-60, February.
  11. Devashish Mitra, 1999. "Endogenous Lobby Formation and Endogenous Protection: A Long-Run Model of Trade Policy Determination," American Economic Review, American Economic Association, vol. 89(5), pages 1116-1134, December.
  12. Riezman, R. & Wilson, J.D., 1993. "Political Reform and Trade Policy," Working Papers 93-09, University of Iowa, Department of Economics.
  13. Levitt, Steven D, 1994. "Using Repeat Challengers to Estimate the Effect of Campaign Spending on Election Outcomes in the U.S. House," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 777-98, August.
  14. Gene Grossman & Elhanan Helpman, 1994. "Electoral Competition and Special Interest Politics," NBER Working Papers 4877, National Bureau of Economic Research, Inc.
  15. Thomas Stratmann & Francisco J. & Aparicio-Castillo, 2006. "Competition policy for elections: Do campaign contribution limits matter?," Public Choice, Springer, vol. 127(1), pages 177-206, April.
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Cited by:
  1. 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.
  2. Zudenkova, Galina, 2010. "Sincere Lobby Formation," Working Papers 2072/151545, Universitat Rovira i Virgili, Department of Economics.
  3. Edward Cartwright & Amrish Patel, 2009. "Does category reporting increase donations to charity? A signalling game approach," Studies in Economics 0924, Department of Economics, University of Kent.
  4. Christopher Cotton, 2008. "Should We Tax or Cap Political Contributions? A Lobbying Model with Policy Favors and Access," Working Papers 0901, University of Miami, Department of Economics.
  5. 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.
  6. Ivan Pastine & Tuvana Pastine, 2006. "Politician Preferences and Caps on Political Lobbying," Working Papers 200619, School Of Economics, University College Dublin.
  7. Ujhelyi, Gergely, 2009. "Campaign finance regulation with competing interest groups," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 373-391, April.
  8. Thomas Stratmann, 2005. "Some talk: Money in politics. A (partial) review of the literature," Public Choice, Springer, vol. 124(1), pages 135-156, July.
  9. Bernd Theilen, 2008. "Lobbying and Contract Delegation in Public Procurement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 38.
  10. 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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