Investing in Polarized America: Real Economic Effects of Political Polarization

Abstract

Political polarization, the increasing ideological distance between the left and the right, is a defining feature of American politics today. We exploit state-level heterogeneity in political polarization to study the economic consequence of the rising polarization. On average, a one standard deviation increase in political polarization reduces firm investment by 1%, equivalent to 16% of the average investment rate. We exploit geographical features and media company expansion to provide evidence of causality. Political polarization is costly for the local economies. Border counties suffer reductions in local employment and establishment growth from increased polarization. We find affective polarization, future policy uncertainty, and dynamic policy inefficiency as the possible channels of decreased investments but little evidence for the gridlock hypothesis.

Keywords: Political polarization, investment, Regional economy

JEL Classification: D72, E22, G18, G31, G38, P16, R11