Relational Influence Buying

Abstract

Existing empirical evidence that finds very high actual or potential return to some campaign contributions and wonders, if contributions buy influence, why more exchange does not occur. Other empirical work has found consistent long-term relationships of contributions from interest groups to politicians. Yet, models of influence buying have treated the exchange as a simple spot transaction. This paper develops a formal model of relational influence buying between a firm and a politician where campaign contributions are exchanged for policy favors in a self-enforcing contract. The feasible contracts can be described in incentive contract or gift-exchange formats. The structures of the contracts provide several insights. First, not all favors that have positive joint surplus to the firm and politician are contractible. This can explain why more, apparently valuable, trade does not occur. Second, the model predicts that horizons of politicians will reduce the ability to raise funds. I find evidence consistent with such horizon effects from US Congress people’s age and term limits in US state legislatures. Third, the model provides empirical predictions for when firms should lobby themselves or outsource and on the structure of legislation. Fourth, under plausible, and empirically observable sufficient conditions, campaign contributions are preferred over direct transfers. The last two results speak both to potential regulatory implications and implications for managers’ influence activities. Finally, the insights from the model suggest empirical tools to detect influence buying without directly observing the favors.

Keywords: Non-market Strategy. Relational Contracts, Campaign Contributions

JEL Classification: L14, D72, C73