The Role of Stock Ownership by US Members of Congress on the Market for Political Favors
London Business School
February 28, 2011
AFA 2011 Denver Meetings Paper
Using data on the stock ownership of US Congress members, the campaign contributions of U.S. firms, and the award of federal contracts, I examine whether politicians’ stock ownership is a mechanism to enforce their quid pro quo relations with firms. Quid pro quo deals are non-contractible agreements between two parties to exchange benefits. I find that ownership of US Congress members in firms contributing to their election campaigns is higher than their ownership in non-contributing firms. This magnitude depends on the value of the relation. Politicians invest more (less) in firms favoring their party (the opposing party). Firms with stronger association between ownership and contribution receive more government contracts. Politicians concentrate their ownership in firms that are not competing on the same government contract. When politicians divest the stock, firms discontinue their contributions to these politicians. By not divesting, politicians preserve their relations with firms.
Number of Pages in PDF File: 49
Keywords: Politicians-Firms relations, Political Connections, Election Contributions, Government Contracts, Investment by Politicians, Commitment Device
JEL Classification: D72, G10, G11, G18, G38working papers series
Date posted: March 19, 2010 ; Last revised: January 2, 2012
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