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Firm-Level Lobbying and Policy Uncertainty: Evidence from Financial Markets
Abstract Elections resolve policy uncertainty, but their effects vary across lobbying and non-lobbying firms. This paper examines whether this is due to firms using lobbying to mitigate the effect of policy changes on their equity prices. Our arguments are both theoretical and empirical. First, we use option prices for over 2,500 publicly-traded firms to examine the implied volatility associated with the 2020 U.S. Presidential election. Once we control for selection into lobbying, we find that lobbying firms have, on average, lower electorally-induced volatility than similar non-lobbying firms. The effects are heterogeneous across sectors. We rationalize these findings through an equilibrium model where heterogeneous firms can choose (i) production; (ii) whether to enter lobbying; and (iii) how much to spend in lobbying if they do so. We structurally estimate this model and decompose the role of selection into lobbying versus the benefits from lobbying in explaining firms' choices, and, ultimately, the decreased volatility implied in option prices. Our results reveal that there are large costs in affecting policy through lobbying. This, combined with a positive fixed cost of lobbying and a highly skewed distribution of the heterogeneous benefits from lobbying (e.g., firms with access and connections) explains why only a small number of firms lobby, despite its benefits. We conclude by discussing the effects of restricting lobbying on consumer and investor welfare.
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Quantifying GATT Trade Liberalization
Abstract Large-scale tariff reductions within the framework of the General Agreement on Tariffs and Trade (GATT) have come as a result of a series of eight rounds of negotiations that began in 1947. Bown and Irwin (2017) have documented the available data---all applied tariffs---and found it to be frustratingly sparse. Somewhat surprisingly, data on the tariff commitments made by the GATT signees has not been widely available, preventing empirical studies on the workings of the GATT and the dynamics of this important episode of trade liberalization. We have been able to locate the original documents that contain the consolidated tariff schedules for each GATT round. To date, we have digitized and standardized the tariff data for the first five rounds for the United States as well as the Smoot Hawley tariffs that were in effect in the United States before the start of the GATT. Work is underway to add the Kennedy, Tokyo and Uruguay rounds for the U.S. and all rounds for several other countries. We summarize this rich data and study the patterns across time and industries.
Extended Abstract
Research and Development Laboratories in the Production Process
Abstract A large body of evidence points to relationships between investment in research and development (R&D), productivity, and economic growth. This study aims to advance the understanding of precisely how R&D investments contribute to the productivity of firms: both the firms that undertake the investments directly as well as neighboring firms that benefit from spillover effects. Combining a unique data set of R&D labs with firm-level data from Compustat and restricted-use Census data at the firm- and establishment-level, this project will first answer a series of descriptive questions about how R&D labs in the U.S. are embedded in the production structure of firms. Are locations devoted to innovation dispersed or concentrated relative to other establishments that perform other functions? Does this vary by industry or domestic ownership status? In which industries do firms tend to locate labs near their own headquarters versus their production facilities or the labs of other firms? This project will extend previous work that identifies the size and location of agglomerations of R&D labs and measures the strength of knowledge spillovers within each agglomeration. Firm-level panel regressions will be used to elucidate the impact on firm productivity of R&D labs, the characteristics of the agglomeration in which labs are located, and the position of labs within the production structure of the firm.
Explaining Gradualism in Trade Agreements: A Political Economy Approach
Abstract A notable feature of many international trading relationships is the gradual way in which barriers to trade have been dismantled in the post-war period (Bhagwati, 1988). Most notably, large-scale tariff reductions within the framework of the GATT/WTO have come as a result of a series of nine rounds of negotiations that began in 1947. From a theoretical point of view, it is not clear why this process should either proceed in stages or be inherently time consuming. But if one begins from the assumption that free trade is efficient, it makes sense to look for mechanisms related to whatever frictions have led to trade being restricted in the first place. I argue that one important reason that inefficient tariffs are maintained is the exertion of political power by inefficient import-competing industries. When an industry encounters a shock to its support such as a key politician losing an election or an important committee position, its ability to maintain its current level of protection is reduced. The resulting loss of protection and therefore rents can lead to erosion of future political power and accompanying protection. I will make this argument using a dynamic model of political economy. I plan to provide supportive evidence from peril point investigations in the early rounds of the GATT negotiations.