Mitigating Policy Uncertainty: What Financial Markets Reveal About Firm-Level Lobbying

Abstract

Elections can lead to significant changes in policy and, thus, are a significant source of policy uncertainty. Firms can respond to such uncertainty by lobbying, but it is hard to quantify whether they do so and, if so, how much lobbying benefits them. We construct a new dataset and firm-level measure of exposure to policy uncertainty using investors' expectations of variability in stock returns in the aftermath of the 2020 US presidential election. We show that lobbying reduces policy uncertainty, and that this result holds even after controlling for selection into lobbying and for sectoral heterogeneity. We then develop and quantify a model of heterogeneous firms with endogenous lobbying. We find that affecting policy through lobbying is costly and the returns from it are highly skewed and rapidly diminishing. Thus, while lobbying expenditures reduce the impact of policy risk, few firms anticipate sufficient gains to invest in it.

Kristy Buzard

Associate Professor of Economics

My current research focuses on the formation and maintenance of international trade agreements, conflict resolution, and innovation. I am particularly interested in the impact of international institutions, government structure and domestic political pressure on the possibilities for cooperation.