Firm Differentiation and Tax Lobbying Decisions: When Firms Lobby Individually or Collectively

To understand why not all firms lobby despite the high returns documented in prior research, we examine how firms’ degree of differentiation from competitors influences their decision to engage in tax lobbying and whether they do so individually or collectively through trade associations. When a firm lobbies for favorable tax treatment, the resulting legislation may also benefit its competitors, reducing the net advantage to the lobbying firm. More differentiated firms, however, can lobby individually for targeted benefits that reflect their unique characteristics. In contrast, firms that closely resemble their peers have incentives to lobby collectively because costs and benefits are shared. We formalize this intuition using a stylized two‐player game that models firms’ lobbying decisions in a competitive environment. Using tax lobbying surrounding the 2004 American Jobs Creation Act as our empirical setting, we find evidence consistent with our predictions. More differentiated firms tend to lobby for tax changes individually, whereas firms are more likely to lobby through trade associations when they are less differentiated from peers or operate in an industry composed of similar‐sized firms. Overall, our findings suggest that firms consider the extent of their differentiation from peers when determining whether and how to lobby, offering insight into the conditions under which firms engage in individual versus collective political action.