Uncertainty

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

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, Nathan Canen, Sebastian Saiegh

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