Capitalizing on Partisan Politics? The Political Economy of Sector-Specific Redistribution in Germany

Abstract

This paper examines the redistributive effects of government partisanship on economic sectors. Based on a rational partisan perspective and policy-induced campaign contribution models we expect that once in office, ideologically different parties deliver favourable policies to different industries, in order to enrich their electoral and sector-specific supporters. Using daily stock market data, we empirically evaluate whether and how the mean and the volatility of returns to four important economic sectors co-varied with the electoral prospects of a right-left-leaning coalition in Germany from 1991 to 2005. This sheds light on the magnitude of sector-specific redistribution to be expected from ideologically different governments holding office. Our estimates show that the mean and the volatility of defence and pharmaceutical sector returns increase if a right-leaning government is becoming more likely to win the upcoming election. In contrast, an increase in the probability of a left-leaning government triggers higher returns to the alternative energy sector and increases the volatility of consumer sector returns. These findings suggest that parties indeed redistribute across industries.

Keywords: Government partisanship, stock market performance, industrial sectors, German federal elections, GARCH modeling, redistribution

JEL Classification: C12, G12, G38