Firm Productivity and Political Activity

• In Event: Political Economy of Lobbying

Abstract

New trade theory (e.g. Melitz 2003) assumes that only productive firms will become exporters, which in turn suggests that at least with regard to trade policy the political activities of firms may be influenced by their respective productivity. Going beyond trade as a single policy issue, I am exploring the relationship between firm productivity and political activity more broadly. Formally, I am considering a model where upon observing productivity (i.e. total factor productivity (TFP)), firms decide on investing in capital and political activities respectively. I conjecture that political activities might depend on firm productivity in a non-linear fashion: on the one hand, as the marginal returns to investment in capital decrease, firms that experience large positive productivity shocks may invest more in political activities, which may serve as an insurance against future negative productivity shocks. On the other hand, firms that experience significant negative productivity shocks may resort to political activities as a means to secure survival. While the concept of “political activities” is intentionally kept broad for the theoretical aspect of this project, I am focusing on lobbying, campaign finance, political connections, and bribery for the empirical part. I classify these activities for different contexts by whether they primarily help firms to secure long-term productivity gains, for instance through lobbying the legislative process, or whether they may lead to short-term gains, such as favorable rule enforcement for a firm obtained e.g. through lobbying or bribing the responsible government agencies. Note that this categorization bears some resemblance to the distinction between bribery and lobbying introduced by Harstad and Svensson (2011).
I am currently exploring this theoretical prediction using Compustat, Bureau van Dijk, and World Bank Enterprise Survey data, as well as lobbying data from the European Union and the US. Total factor productivity is estimated based on Olley and Pakes’ (1996) method, and variations across time, industries, and policy issues will be examined. I further consider the mediating roles that market structures, political institutions, and uncertainty/volatility play for the relationship between productivity and political activities by firms. While I have restricted myself to the examination of correlative evidence up to this point, I am hoping to leverage the differential impact the financial crisis had on firms depending on their level of product differentiation as an instrument in order to build a stronger case for a causal claim. Structural estimation of the above mentioned model is furthermore planned for future stages of this project. Based on a thorough understanding of the multi-faceted nature of firm-level political engagement, such a structural model should help gauge the welfare effects of firm political activity, thus speaking to a recent literature in development economics and industrial organization on resource misallocation (see Hsieh and Klenow 2009; Asker et al. 2014).

Author

• Johannes Wiedemann, Yale University