Unexpected politics: Do interest rates influence lobbying expenditure?

How do changing interest rates influence lobbying expenditure? I study a two-stage game consisting of a policy-maker and heterogeneous firms that produce partial substitutes. The policy-maker chooses whether to implement a reform that will raise production costs or maintain the status quo. Firms can allocate capital to lobbying the policymaker for their preferred outcome. After making lobbying contributions and observing the policy-maker’s choice, firms compete to maximize profit. I study the relationship between interest rates and each firm’s optimal lobbying expenditure. In an extension, I consider how the introduction of additional firms complicates the results. Regardless of conditions, I find that higher interest rates cause an increase in the share of total lobbying expenditure contributed by firms with a competitive advantage. Combining insights from prior research with my theoretical results, I hypothesize that firms who contribute a large share of aggregate lobbying expenditure will provide an even greater share in response to rising interest rates. Using firm level data, I present robust correlations consistent with my hypothesis. My findings reveal that interest rates may have an unexpected and complex impact on the nature and distribution of money in politics.