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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.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:10928
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    References listed on IDEAS

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    1. 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.
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    Citations

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    Cited by:

    1. Cartwright, Edward & Patel, Amrish, 2013. "How category reporting can improve fundraising," Journal of Economic Behavior & Organization, Elsevier, vol. 87(C), pages 73-90.
    2. Zudenkova, Galina, 2010. "Sincere Lobby Formation," MPRA Paper 28249, University Library of Munich, Germany.
    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. Pastine, Ivan & Pastine, Tuvana, 2006. "Politician Preferences and Caps on Political Lobbying," CEPR Discussion Papers 5913, C.E.P.R. Discussion Papers.
    6. Ujhelyi, Gergely, 2009. "Campaign finance regulation with competing interest groups," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 373-391, April.
    7. Thomas Stratmann, 2005. "Some talk: Money in politics. A (partial) review of the literature," Public Choice, Springer, vol. 124(1), pages 135-156, July.
    8. 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.
    9. Christopher Cotton & Cheng Li, 2016. "Clueless Politicians," Working Papers 1341, Queen's University, Department of Economics.
    10. Tatyana Chesnokova, 2010. "Lobby Interaction and Trade Policy," School of Economics Working Papers 2010-04, University of Adelaide, School of Economics.
    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 & Sen, Ananya & Yildirim, Pinar, 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, 2012. "Lobbying as a Guard against Extremism," Working Papers 2072/184036, Universitat Rovira i Virgili, Department of Economics.
    14. 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.
    15. 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.
    16. 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.
    17. Peter Grajzl, 2011. "A property rights approach to legislative delegation," Economics of Governance, Springer, vol. 12(2), pages 177-200, June.

    More about this item

    JEL classification:

    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • H0 - Public Economics - - General
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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