Political Contribution Caps and Lobby Formation: Theory and Evidence

45 Pages Posted: 14 Dec 2004 Last revised: 5 Jan 2005

See all articles by Allan Drazen

Allan Drazen

University of Maryland - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Nuno Limão

University of Maryland - Department of Economics

Thomas Stratmann

George Mason University - Buchanan Center Political Economy; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 2004

Abstract

The perceived importance of "special interest group" money in election campaigns motivates widespread use of caps on allowable contributions. We present a bargaining model in which putting a cap that is not too stringent on the size of the contribution a lobby can make improves its bargaining position relative to the politician, thus increasing the payoff from lobbying. Such a cap will therefore increase the equilibrium number of lobbies when lobby formation is endogenous. Caps may then also increase total contributions from all lobbies, increase politically motivated government spending, and lower social welfare. We present empirical evidence from U.S. states consistent with the predictions of the model. We find a positive effect on the number of PACs formed from enacting laws constraining PAC contributions. Moreover, the estimated effect is nonlinear, as predicted by the theoretical model. Very stringent caps reduce the number of PACs, but as the cap increases above a threshold level, the effect becomes positive. Contribution caps in the majority of US states are above this threshold.

Suggested Citation

Drazen, Allan and Limão, Nuno and Stratmann, Thomas, Political Contribution Caps and Lobby Formation: Theory and Evidence (November 2004). NBER Working Paper No. w10928. Available at SSRN: https://ssrn.com/abstract=622872

Allan Drazen (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742-1815
United States
301-405-3477 (Phone)
301-405-7835 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nuno Limão

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-7842 (Phone)
301-405 3542 (Fax)

Thomas Stratmann

George Mason University - Buchanan Center Political Economy ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-2330 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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