Investing in Polarized America: Real Economic Effects of Political Polarization

62 Pages Posted: 7 Apr 2021 Last revised: 26 Mar 2024

See all articles by Qiaoqiao Zhu

Qiaoqiao Zhu

Australian National University (ANU) - College of Business and Economics; Financial Research Network (FIRN)

Date Written: March 15, 2024

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

Suggested Citation

Zhu, Qiaoqiao, Investing in Polarized America: Real Economic Effects of Political Polarization (March 15, 2024). Available at SSRN: https://ssrn.com/abstract=3820979 or http://dx.doi.org/10.2139/ssrn.3820979

Qiaoqiao Zhu (Contact Author)

Australian National University (ANU) - College of Business and Economics ( email )

Canberra, Australian Capital Territory 2601
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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