Firms' Lobbying Decisions and Legislators' Investment Portfolios

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Abstract

Why do some firms lobby legislators on trade? We have long suspected that collective action plays a role—large firms in concentrated industries find it more feasible to coordinate their lobbying efforts or to lobby independently (perhaps due to lobbying’s high fixed costs). Additionally, the idea that productive firms in differentiated industries gain the most from free trade has gained traction. Evidence strongly suggests that productive firms producing differentiated products can overcome collective action problems because these differentiated products can be precisely targeted by trade policy. These firms lobby legislators more.

Yet, this work focuses on the characteristics of the firms in analyzing firms’ lobbying decisions. Scant attention is paid to how the characteristics of those lobbied may matter. Early work simply asserted that "national interest" led legislators to listen to the lobbying efforts of firms seeking protection (Schattschneider 1935). Others model the government as a unitary actor to whom firms pay rents in the form of campaign contributions (Grossman and Helpman 1994) or lobbying expenditures (Kim 2017).

If firms are strategic and lobbying is costly, they should be more likely to lobby when they believe they might receive policy concessions. Legislators may respond differently to different firms. I contend that, for several reasons, legislators' are likely to be biased in favor of firms in their investment portfolios. Firms, in turn, should be more likely to lobby when legislators own them. There are at least two possible mechanisms for this. First, some firms may use their shareholder lists and legislators' financial disclosures to determine if legislators own them. Second, firms may learn by experience whether lobbying works and adjust their actions accordingly, without knowing precisely what determined legislators' responsiveness.

I test this insight using 22,500 firm decisions to lobby Congress (comprising the decisions all firms listed on major US indices and producing tradable goods, covering the years 2004 to 2014). Adjusting for potential confounders—inter alia industry, differentiation, market capitalization, and productivity—firms owned by at least one legislator lobby six-times as often. The effect increases as more legislators own a firm.

To address the concern of simultaneity—legislators investing because firms lobby—I explore empirical implications only consistent with my theory. For example, House members outnumber and have more assets than senators; if lobbying leads legislators to invest, we would expect the relationship between lobbying and firm ownership to be stronger in the House. Yet, I find the opposite, consistent with the idea that senator ownership matters more to firms since a senator's vote matters more and senators have more legislative autonomy. I also expect (and find) that firms should lobby more when owned by legislators in the chamber majority party—this makes sense since these legislators have influence over policy. Further, building off previous findings, small firms should be more influenced by whether legislators own them or not, since the fixed costs of lobbying represent a more significant burden for them. I find the lobbying decisions of firms outside of the S&P 500 are significantly more impacted by legislator ownership.

I address concerns about omitted variable bias in two ways. First, I exploit the fact that firms report which chamber they lobby, showing that firms tend to lobby the chamber that owns them. An omitted firm characteristic driving both lobbying and legislators' investments would be unlikely to result in this chamber-specificity. Second, I use a matching approach appropriate for this time series, cross-sectional data to estimate the causal effect of legislators' ownership on firm lobbying. Even though this approach excludes many firms---those that lobbied in every period---and thus may underestimate the effect, ownership by at least one legislator still makes a firm twice as likely to lobby. I also offer evidence that legislators that own firms that lobby tend to support FTAs more often.

These findings open up unexplored avenues of inquiry into firms' political activity. Do such factors affect their lobbying of other governmental bodies? Do these factors matter even more in states with weaker electoral institutions? Does this behavior replicate across issues like immigration, currency policy, and financial regulation?


Grossman, Gene M., and Elhanan Helpman. 1994. “Protection for Sale.” The American Economic Review 84 (4): 833–50.

Kim, In Song. 2017. “Political Cleavages Within Industry: Firm-Level Lobbying for Trade Liberalization.” American Political Science Review 111 (1): 1–20.

Schattschneider, Elmer Eric. 1935. Politics, Pressures and the Tariff: A Study of Free Private Enterprise in Pressure Politics, as Shown in the 1929–1930 Revision of the Tariff. Englewood Cliffs, NJ: Prentice-Hall.

Author

• Caleb Ziolkowski, UCLA