Lobbying

Firm-Level Lobbying and Policy Uncertainty: Evidence from Financial Markets

Elections resolve policy uncertainty, but their effects vary across lobbying and non-lobbying firms. This paper examines whether this is due to firms using lobbying to mitigate the effect of policy changes on their equity prices. Our arguments are both theoretical and empirical. First, we use option prices for over 2,500 publicly-traded firms to examine the implied volatility associated with the 2020 U.S. Presidential election. Once we control for selection into lobbying, we find that lobbying firms have, on average, lower electorally-induced volatility than similar non-lobbying firms. The effects are heterogeneous across sectors. We rationalize these findings through an equilibrium model where heterogeneous firms can choose (i) production; (ii) whether to enter lobbying; and (iii) how much to spend in lobbying if they do so. We structurally estimate this model and decompose the role of selection into lobbying versus the benefits from lobbying in explaining firms' choices, and, ultimately, the decreased volatility implied in option prices. Our results reveal that there are large costs in affecting policy through lobbying. This, combined with a positive fixed cost of lobbying and a highly skewed distribution of the heterogeneous benefits from lobbying (e.g., firms with access and connections) explains why only a small number of firms lobby, despite its benefits. We conclude by discussing the effects of restricting lobbying on consumer and investor welfare.

Kristy Buzard, Nathan Canen, Sebastian Saiegh

Temporary Trade Barriers: When Will They End?

{Under WTO law, temporary trade barriers such as antidumping duties must be removed after a period of four or five years. However, under rather vague legal conditions, they can be renewed. This institutional environment provides the structure to carefully study the determinants of the extit{length} of protection. We present a theoretical political-economy model of the renewal process and find that the probability a temporary trade barrier will be renewed decreases in the level of trade agreement tariffs and is also likely to decrease in the level of the anti-dumping duties. An increase in an industry's profitability is shown to increase the probability of renewal also increases. Lobbying effort also increases the probability for a fixed strength of the lobby, while the strength of the lobby itself has more nuanced effects on the renewal probability.

Self-enforcing Trade Agreements and Lobbying

'In an environment where international trade agreements must be enforced via promises of future cooperation, the presence of an import-competing lobby has important implications for optimal punishments. When lobbies work to disrupt trade agreements, a Nash reversion punishment scheme must balance two conflicting objectives. Longer punishments help to enforce cooperation by increasing the government's costs of defecting, but, because the lobby prefers the punishment outcome, this also incentivizes lobbying effort and with it political pressure to break the agreement. Thus the model generates an optimal length for Nash reversion punishments, and it depends directly on the political influence of the lobbies. Trade agreement tariffs are shown to be increasing in the political influence of the lobbies, as well as their patience levels.'

Trade Agreements in the Shadow of Lobbying

This paper presents a model of international trade agreements in which the executive branches of each government negotiate agreements while the legislative branches, subject to political pressure from firms, can disrupt them. Lobbying is in the style of Grossman and Helpman's ‘Protection for Sale’ model with a new feature: all actors face uncertainty arising from the complexity of the legislative process. I demonstrate that the higher the executives set tariffs in a trade agreement, the less effort lobbies put forth to prevent its ratification. Thus trade agreements act as a domestic political commitment device: executives set relatively high tariffs to discourage lobbying and increase the chance that the agreement will be ratified. The model sheds light on the empirical puzzle surrounding governments’ welfare weights in the Grossman and Helpman model and provides a new explanation for failures to ratify trade agreements.

Lobbying and Legislative Uncertainty

This paper seeks to understand how uncertainty affects the incentives for lobbying and the associated prospects for the passage of legislation. We introduce a model of vote buying in which there is uncertainty about the ideological positions of legislators with information about this uncertainty symmetric among all players. When legislators' voting behavior cannot be perfectly anticipated in this manner, the model is able to describe various realistic aspects of lobbying and voting behavior. For example, it predicts that lobbyists on both sides of an issue may be active at the same time, that moderate legislators and those about which there is average uncertainty receive more bribes than those that are ideologically extreme, and that ideal points gross of bribes need not be equalized. Estimating ideal points using a logistic item response model, we find support for these predictions in U.S. House of Representatives roll call data.

Kristy Buzard, Sebastian Saiegh