Follow the Money

Grotteria, M (2024) Follow the Money. Review of Economic Studies, 91 (2). pp. 1122-1161. ISSN 0034-6527 OPEN ACCESS

Abstract

I study, both empirically and theoretically, the economic and financial consequences of corporate lobbying. Firms lobby politicians to increase their share of government contracts, but political competition creates firm-level risk, inflating their cost of capital and reducing their incentive to invest in research and development (R&D). I document an annual 6%–8% return premium for stocks of high-lobbying firms, which compensates investors for political risk. An estimated model in which firms can lobby and innovate and investors are risk averse replicates key features of corporate lobbying in the US, including the well-established paradox that lobbying contributions are small relative to the policies at stake. The model predicts that if investors ceased seeking compensation for political risk, R&D investment would increase by 6% and the innovation rate by 0.4 percentage points. The risk-premium costs of lobbying are quantitatively and economically important even if the resources “wasted” on lobbying are objectively small.

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Item Type: Article
Subject Areas: Finance
Date Deposited: 26 Jun 2023 11:10
Date of first compliant deposit: 26 Jun 2023
Last Modified: 01 Oct 2024 12:19
URI: https://lbsresearch.london.edu/id/eprint/2855
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