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 study the economic consequence of the rising polarization on firm investment and local economies. We find that a one standard deviation increase in roll-call-based state-level political polarization decrease firm investment by 1%, which is 16% of the average. The negative effect is more pronounced for geographically less diversified firms, more profitable firms, and firms with more irreversible investments and is robust to the alternative speech-based polarization measure. Political polarization is costly for the local economies. Border counties suffer reductions in local employment and establishment growth from increased polarization. We use geographical features to provide evidence of causality.

Keywords: Political polarization, investment, Regional economy

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