Follow the Money

49 Pages Posted: 8 Dec 2018 Last revised: 1 Jun 2023

See all articles by Marco Grotteria

Marco Grotteria

London Business School; Centre for Economic Policy Research (CEPR)

Date Written: December 13, 2022

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.

Keywords: Lobbying, Expected Returns, Imperfect competition, Strategic interaction

JEL Classification: G12, G32, L10, L22

Suggested Citation

Grotteria, Marco, Follow the Money (December 13, 2022). Available at SSRN: https://ssrn.com/abstract=3281201 or http://dx.doi.org/10.2139/ssrn.3281201

Marco Grotteria (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/marcogrotteria/home

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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