Tug of War in Corporate Environmental Lobbying

Abstract

We study how firms with opposing environmental stances can engage in tug of war in environmental lobbying, leading to a deadweight loss from the political competition. We build a theoretical model where firms choose their lobbying level to influence a policymaker's environmental policies, considering other firms' lobbying activities. An important prediction of the model is that firms with opposing environmental stances have to spend extra lobbying expenditure over the rival, culminating in the tug of war. The model also predicts that this tug-of-war effect is greater when the environmental policy uncertainty is higher, a firm's financial constraint is not binding, and the product market competition is stiff. We empirically substantiate these theoretical predictions using corporate lobbying reports in the U.S. Moreover, the tug of war raises the cost of capital and impairs a firm's R&D investment, capital investment, sales growth, profitability, and employment. Overall, the analysis highlights a potential deadweight loss arising from fierce political competition among firms with opposing environmental stances.