'Political Power and Market Power' (NBER Working Paper No. 33255, 2024) by Bo Cowgill, Andrea Prat and Tommaso Valletti comments
Brandeis (1914) hypothesized that firms with market power will also attempt to gain political power. To explore this hypothesis empirically, we combine data on mergers with data on lobbying expenditures and campaign contributions in the US from 1999 to 2017. We pursue two distinct empirical approaches: a panel event study and a differential exposure design. Both approaches indicate that mergers are followed by large and persistent increases in lobbying activity, both by individual firms and by industry trade associations. There is also weaker evidence for an association of mergers with campaign contributions (PACs). We also find that mergers impact the extensive margin of political activity, for example, by impacting companies’ choice to establish their first inhouse lobbying teams and/or first corporate PAC. We interpret these results within an oligopoly model augmented with endogenous regulation and lobbying.
Lobbying and campaign finance are essential elements of modern democracy (Ansolabehere et al., 2003; Cage, 2020; Grossman and Helpman, 1994). On the positive side, they can help elected officials gather information needed to make policy choices and can help voters become informed about candidates. However, they also raise legitimacy and fairness concerns, as agents with greater wealth can exercise greater influence over the political process. In this paper, we study the link between political influence and industry concentration. This link is important for two reasons. First, businesses represent the largest source of lobbying spend. According to data from OpenSecrets, businesses accounted for 87 percent of total lobbying spending in the US in 2019 and 36 percent of contributions from Political Action Committees (PACs) in the 2017/18 political cycle (where labor and ideological contributions also contributed a big share).
Second, in recent years there has been rising concern that industrial concentration not only affects consumers directly through market power (potentially raising prices and reducing quantities), but also indirectly through politics (Wu, 2018; Zingales, 2017). Apprehension over the political influence of concentrated industries has appeared throughout the history of antitrust (e.g., Brandeis, 1914; Khan, 2017; Pitofsky, 1978). Incumbent firms could lobby politicians to erect barriers to entry and protect their market power. This is another form of consumer harm, but one that flows through the channel of regulation. If lobbying exhibits economies of scale, a rise in market concentration should lead to an increase in lobbying activity. If this hypothesis is correct, market power begets political power.
To guide the empirical analysis (the core of this paper), we begin with a simple theoretical model capturing the relationship between market concentration and political influence. The model examines an oligopoly in which firms’ profits may be affected by regulation. Firms engage in lobbying activity to influence their regulation using the menu auction model by Grossman and Helpman (1994).
We use our model to study how the political and product market equilibria change when two firms merge. A merger is a discrete event that leads to a change in concentration. We provide broad conditions for a merger to increase political influence activity. The intuition is that market competition within an industry partly dissipates the rents that accrue to firms from regulatory protection. By softening competitive pressure, a merger tends to increase the incentive of firms to lobby for regulation. Our model generates predictions for the merging entities and for the industry as a whole. It also distinguishes between the impact of mergers both at the extensive margin (firms’ choice to lobby at all) and the intensive margin (how much to lobby).
The core of the paper studies data spanning almost two decades, 1999-2017, and asks whether mergers are associated with an increase or a decrease in political influence activities. We examine SEC-registered companies, matching each company with data about both its federal lobbying and its campaign contributions in the US (both before and after mergers). Lobbying money is mostly spent to influence specific administrations and committees, whereas PACs are geared towards getting a party or a politician elected.
To investigate how political influence spending varies with a merger, we pursue two empirical approaches. In the first, we use a panel event study design (Athey and Imbens, 2022; De Chaisemartin and d’Haultfoeuille, 2020; Freyaldenhoven et al., 2021; Gentzkow et al., 2011; Goodman-Bacon, 2021). Qualitatively, identification in this approach relies on the idea that mergers are endogenous, but depend on fixed (or slow-moving) variables whose trends we control for. The identification assumption is that, after conditioning on all these other factors, mergers come from idiosyncratic shocks that are unrelated to the returns of political spending. Our second research design is a differential exposure design (Borusyak and Hull, 2023; Breuer, 2022; Goldsmith-Pinkham et al., 2020) that uses a logic similar to the Bartik (1991) instrumental variable design. Like other Bartik-like designs, ours employs a combination of time-varying shocks and initial characteristics of companies that are exposed differentially to those shocks. For time-varying shocks, we use economy-wide pro-merger shocks, following the well-documented pattern of mergers arriving in waves (Gort, 1969; Nelson, 1959; Weston et al., 1990). These waves span multiple sectors and have several proposed causes ranging from macroeconomic shocks to technology shocks.
In both designs, our results suggest that mergers are positively associated with an increase in firms’ spending on political influence activities. The average merger is associated with a $70K to $180K increase in the amount spent on lobbying per period (half year) after the merger, or approximately 15% to 35% of the average per-period spend of merging firms. The average merger is also associated with an approximately $4K to $10K increase in campaign contributions per period, but this association is not statistically significant in all specifications. In particular, we link mergers to the extensive margin of influence – i.e., a firm’s choice to establish political operations at all. At the beginning of our sample, only 8% of firms lobbied, and only 5% of firms had a corporate PAC (a vehicle for corporate campaign contributions).
During our sample period, the average merger is associated with a 1.5 to 2.1 percentage point increase in setting up an in-house lobbying operation for the first time in the company’s history (at least since government lobbying records were kept). Merging is similarly associated with a 1.6 to 1.9 percentage point increase in initiating a corporate PAC. Once initiated, political operations are highly persistent. Following the establishment of an in-house lobbying operation, an average business lobbies in 87% of the remaining periods in our sample. Once a business sets up a PAC, the average PAC is active in 76% of remaining periods. Kerr et al. (2014) find similar results about persistence.
Across multiple specifications and outcomes, the association of mergers with influence activities is significantly stronger if the merging companies are larger, and if the merging companies belong to the same industry. Our results are consistent with the idea that lobbying scales with firm size. We find a similar positive association between mergers and political activity by the industry as a whole, and with the political spend of industry trade associations. Finally, we pursue several robustness checks, highlighting two here. First, we consider a possible mis-specification problem. Merging firms may ramp up their influence activities before the merger, perhaps to increase the chance of the transaction being approved by regulatory authorities. However, we find little evidence in the data for such an anticipation effect.
This null result may be a reflection of the fact that most mergers during our sample period were not scrutinized by US antitrust authorities (Wu, 2018).
Second, we measure whether firm-level political risk changes with mergers. Following a merger, firms may face more scrutiny from regulators if the merged entity becomes a politicized target of attack. The merged firm may increase lobbying, not because of rent dissipation and externalities (as in our theoretical framework), but because of a new adversarial environment. Hassan et al. (2019) develop methods for quantifying firm-level political risk based on the contents of quarterly earnings conference calls. Using this data, we find no evidence of higher political risk after a merger.
