Debt and Incentives in Political Campaigns *

Transcription

1 Det nd Inentives in Politil Cmpigns * Alexei Ovthinnikov nd Philip Vlt Mrh 15, 2017 Astrt Det is signifint soure of funding of politil mpigns, with lmost hlf of ll mpigns relying on some form of det. In this pper, we nlyze the legisltive inentives reted y this type of det finning. We find tht indeted politiins rise more funds in susequent eletions, espeilly from speil interest groups. We lso show evidene of votes-for-money rrngements, espeilly mong indeted politiins, wherey politiins vote for the enefit of those interest groups tht help funding their reeletion mpigns. The results re onsistent with the view tht det retes legisltive distortions nd exertes the prinipl-gent prolem euse it fores indeted politiins to tke poliy positions tht re not ligned with the lol onstituents interests. * Ovthinnikov is with HEC Pris. Emil: ovthinnikov@he.fr. Vlt is with the University of Bern, the University of Genev, nd the Swiss Finne Institute. Emil: philip.vlt@ifm.unie.h. We thnk Lurent Frésrd nd seminr prtiipnts t HEC Pris, Lnster University, University of Birminghm, University of Bristol, University of Exeter, University of Friourg, nd the University of Zurih for helpful omments nd suggestions.

2 The finne literture hs dedited onsiderle effort to studying finning deisions of eonomi gents. In orporte finne, sine the pioneering work of Modiglini nd Miller (1958) showing tht orporte finning deisions re irrelevnt in fritionless world, reserhers hve foused on the role of finning fritions on pitl struture hoies of firms. Six dedes of reserh show tht firm s reline on det finning is funtion of its mrginl tx rte, the dedweight loss in defult, the informtion environment, nd the inentive onflits mong its limnts (see, e.g., Grhm (2008) nd Frnk nd Goyl (2008) for exellent reviews). In other res of finnil eonomis, orrowing deisions hve een the sujet of intense nlysis in the household finne, orporte governne, nd the politil eonomy fields, just to nme few. 1 While the importne of finning deisions for firms, households, onsumers, governments, nd top mngement hs een long reognized, little is known out finning deisions (speifilly the reline on det finning) of politil mpigns nd the impt of those deisions on the legisltive proess. This lk of evidene is surprising from oth theoretil nd n empiril point of view. From the theoretil perspetive, representtive demories re geny reltionships, wherey lol onstituents (the prinipls) elet representtives (the gents) to represent the prinipls interests in the legisltive deision-mking. Jensen nd Mekling (1976) nd onsiderle ody of reserh tht followed suggest tht the wy in whih (re)eletion mpigns finne themselves n hve signifint effet on the dynmis of the prinipl-gent reltionship euse orrowing deisions my ffet the representtives legisltive inentives. On the empiril front, the U.S. politil mpigns re ostly nd require sustntil fundrising efforts on the prt of politiins seeking offie. Over the period, whih enompsses our study, politil mpigns for the U.S. House of Representtives nd the Sente hve rised totl of $19.8 illion in 2014 dollrs. Importntly, signifint portion of tht totl is det pitl. At $1.9 illion or 10.6 perent of the totl, det onstitutes the seond lrgest soure of mpign funds, preeded only y individul ontriutions nd is lrger thn totl ontriutions from orporte, lor nd trde Politil Ation Committees (PACs). Cmpign orrowing is 1 In household finne, see e.g., Cmpell nd Coo (2003) for the nlysis of mortgge mrkets, Vissing-Jorgensen (2012) for the nlysis of the onsumer nd redit rd lending mrkets, Looney nd Ynnelis (2015) for the nlysis of the student lon mrkets, nd Morse (2011) for the nlysis of the pydy lending mrkets. In orporte governne, see e.g., Behuk nd Jkson (2005) Sundrm nd Yermk (2007), Edmns nd Liu (2011), nd Wei nd Yermk (2011) for evidene on the importne of inside det in mitigting firm risk-shifting. In politil eonomy, see e.g., Cukiermn nd Meltzer (1989), Persson nd Svenson (1989), Alesin nd Tellini (1990), Arellno nd Rmnrynn (2012), Song, Storesletten, nd Ziliotti (2012) for the nlysis of fisl poliy nd government det.

3 pervsive, with nerly hlf of ll mpigns relying on some form of det. Borrowing mpigns rise lmost third of totl mpign funds through det, nd three qurters of indeted mpigns rry det into susequent eletions. It is ler tht the potentil legisltive inentive distortions reted y the use of det in politil mpigns n e signifint. On the one hnd, det rried over from prior mpigns inreses the demnd for future fundrising sine new pitl is required to fight the reeletion mpign nd to servie / retire existing det. 2 This hs the potentil to inrese the indeted politiins inentives to trde voting fvors in return for ontriutions from outside speil interest groups. The rgument uilds on the Stigler (1971) / Peltzmn (1976) frmework of the politil proess, in whih (i) inument politiins wish to remin in offie, (ii) (re)eletions re ostly so outside funds re needed to finne politil mpigns, nd (iii) speil interest groups supply politil support (votes nd mpign funds) in exhnge for fvorle legisltion. In this frmework, n inument politiin stnding for reeletion ut lso rrying det from prior mpign hs greter inentive to pledge fvorle legisltion to speil interest groups in return for mpign funds ompred to n otherwise similr det-free politiin, sine funds re required to py down the existing det in ddition to finning the reeletion id. This hypothesis, whih we term the vote pledging hypothesis, implies tht (i) indeted politiins rise more funds in future reeletion mpigns nd (ii) indeted politiins re more likely to pledge fvorle legisltion in return for mpign funds from speil interest groups even if doing so results in politiins deviting from the legisltive preferenes of the lol onstitueny. On the other hnd, det from prior mpigns my fore indeted politiins to tke poliy positions tht re loser to the legisltive preferenes of the lol onstitueny. If politiins fe fixed supply of totl mpign funds throughout their legisltive reers, det simply shifts future mpign funds to the present. Sine t lest portion of future mpign funds must now e diverted to serviing old mpign det, the pool of future reeletion funds is smller, eteris prius. If fewer funds re ville for suppression of opposition (Peltzmn (1976)) nd other mpign ttis, indeted politiins hve little hoie ut to lign their poliy positions with those of the lol onstitueny to seure reeletion votes nd mximize their reeletion hnes. This is in spirit the Jensen (1986) free sh flow rgument. In ontrst to the vote pledging hypothesis, the lignment hypothesis implies tht (i) indeted politiins rise similr mounts 2 We show in our empiril nlysis tht mpigns work tively to retire existing det. 2

4 of mpign funds in future reeletion mpigns (euse the totl supply of mpign funds is fixed) nd (ii) indeted politiins re more likely to lign their poliy positions to the legisltive preferenes of the lol onstitueny. Wht impt det finning hoies hve on future mpign fundrising nd legisltive hoies of indeted politiins is, therefore, n empiril question. In this pper, we nlyze the preditions of the vote pledging nd the lignment hypotheses. Using omprehensive smple of lmost 22,000 politil mpigns for the U.S. House of Representtives nd the Sente over the period , we first show tht det is mjor soure of funding for politil mpigns. Almost hlf of ll mpigns (46.75 perent) rely on some form of det, nd, onditionl on orrowing, mpigns orrow lmost third of totl rised funds. The mjority of mpign det omes in the form of personl lons tht ndidtes mke to their own mpigns, with only eight perent of mpigns relying on outside lons. Conditionl on orrowing from outside soures, mpigns orrow 10 perent of totl rised funds. We lso show tht the mjority of mpigns tht orrow funds re still indeted t mpign end. However, one rried over into future mpigns, det does not linger on mpign ooks. The verge det mturity is 2.72 yers in our smple, fr less thn the verge mpign life of seven yers, so mpigns work tively to retire existing det. The orrowing nd repyment ptterns re similr ross Repulin nd Demorti mpigns nd ross the House nd the Sente mpigns. When we split the smple y the mpign sttus, the results show tht inument mpigns re fr less dependent on det finning ompred to hllenger nd open re mpigns. Compred to inument mpigns, hllenger nd open re mpigns re five times more likely to orrow funds from their own ndidtes nd twie more likely to orrow from outside soures. Moreover, onditionl on orrowing, hllenger nd open re mpigns re four times more relint on own ndidte det finning in totl fundrising nd lmost three times more relint on outside det finning ompred to inument mpigns. Given the importne of det in mpign fundrising, we turn to nlyzing the preditions of the vote pledging nd the lignment hypotheses. In the first series of tests, we fous on the first predition nd study the impt of det deisions on susequent mpign fundrising. Consistent with the vote pledging hypothesis, we show tht indeted politiins rise perent more funds in susequent eletions ompred to det-free politiins. Additionl funds ome from individuls nd from PACs tht represent different speil interest groups. When we deompose PAC ontriutions y the identity of PAC sponsors, we find tht dditionl funds ome from orporte, 3

5 prty, lor, trde, memership, nd non-onneted ommittees. Thus, we find little evidene tht ertin types of PACs speilize in supporting indeted politiins. We dig deeper nd show tht the extr mpign funds ome primrily from indeted politiins rehing out to greter numer of PACs (s opposed to lrger ontriutions from the existing PACs), lthough we lso find tht lor nd trde PACs give lrger dontions to indeted politiins. The results re stronger for Demorts nd for House ndidtes, espeilly for lor PAC ontriutions. In ll regressions, we ontrol for politiin, time, nd stte time fixed effets s well s host of politiin-eletion yle ontrol vriles, whih helps soring ny mro- or stte-level time trends, nd ny timeinvrint politiin hrteristis. Thus, ll identifition in our tests omes from the withinpolitiin hnges in fundrising ehvior used y the existene of prior mpign det. 3 In the seond series of tests, we turn to the seond predition of the vote pledging nd the lignment hypotheses nd study the impt of det deisions on future legisltive deisions. Using three independent legisltive settings to minimize onerns out dt mining nd the generlity of our onlusions, we show tht indeted politiins voting ehvior is onsistent with the preditions of the vote pledging hypothesis nd does not mth well the preditions of the lignment hypothesis. The first setting tht we nlyze is legisltor voting on lor-relted legisltion. We show tht indeted politiins re muh more likely to vote pro-lor if they reeive politil ontriutions from lor unions ompred to det-free politiins. This ehvior is prtiulrly pronouned in non-eletion yers, presumly when it is esier for lwmkers to void undue ttention from lol onstituents. The nlysis for non-eletion yers is sed on politiins votes on 252 lor-relted ills, nd the results imply tht n indeted politiin is expeted to vote prolor on 5.6 dditionl ills for every one-stndrd devition inrese in lor ontriutions, ompred to 1.2 dditionl ills for det-free politiin. We go further nd show tht this is not simply lol onstitueny effet (i.e., lor PACs ontriuting funds to politiins who represent Congressionl Distrits (CDs) with hevy presene of orgnized lor). On the ontrry, the higher sensitivity of lor voting to lor ontriutions for indeted politiins is onentrted in CDs with low lor unioniztion, whih is inonsistent with the lignment hypothesis. We next turn to nlyzing voting deisions on trde-relted legisltion. Using similr methodology, we show tht indeted politiins vote signifintly less pro-trde if they reeive 3 Our regressions inlude 1,451 unique politiins, 505 of whom (34.8%) swith etween the indeted nd det-free sttus t lest one during our smple period. 4

6 mpign funds from lor nd orporte PACs nd signifintly more pro-trde if they reeive funds from trde PACs. The trde-voting results re quite strong nd show tht, of the 189 ills onsidered, indeted politiins re expeted to hnge their votes on s mny s 18.5 ills for every stndrd devition inrese in ontriutions from lor, orporte, or trde PACs, ompred to merely 4.6 ills for det-free politiins. In further tests, we show tht the results nnot e explined y the lol onstitueny effet. Indeted politiins re just s sensitive in their trde voting deisions to lor ontriutions if they represent low or high lor unioniztion CDs nd there is no pttern in trde-voting sensitivity to trde ontriutions ross CDs tht re more or less likely to e hurt y trde. In the lst test, we tke loser look t orporte ontriutions nd show tht indeted politiins re muh less likely to vote pro-trde if they reeive politil ontriutions from industries tht re more likely to e hurt y foreign trde. The lst setting tht we onsider is legisltor voting on finne-relted legisltion. Following Strtmnn (2002), we fous on the voting ehvior of indeted nd det-free politiins on two similr piees of legisltion oth deling with the repel of the 1933 Glss-Stegll At. The first vote tht we nlyze is the roll ll vote on the Brnrd Amendment (onsidered s prt of the 1991 Finnil Institutions Sfety nd Consumer Choie At (H.R. 6)) tht would hve llowed nks to enter the insurne nd investment nking usiness. The ill ws supported y the nking industry ut opposed y the insurne nd investment ompnies nd ws rejeted y vote on Otoer 31, The seond vote is the roll ll vote on the 1998 Finnil Servies At (H.R. 10) tht removed ll remining rriers preventing nks from ffiliting with insurne nd investment ompnies. The ill, opposed y the nking industry (euse mny of its provisions were viewed s step kwrd y the nks) ut supported y the insurne nd investment ompnies ws pssed y mrgin on My 13, We study whether politiins who tke on det during the period re more likely to swith their votes s funtion of politil ontriutions reeived from nks or insurne / investment ompnies ompred to det-free politiins. We find strong evidene of the vote swithing ehvior, espeilly for indeted politiins. The results re onsistent with the vote pledging hypothesis ut re diffiult to interpret under the lignment hypothesis euse the omposition of the lol onstitueny remins lrgely fixed etween the votes. The results in this pper mke three ontriutions to the existing literture. First, we provide novel evidene on the finning ptterns of politil mpigns. We know of no other pper tht hs investigted this question previously. Our results show tht det onstitutes n importnt 5

7 soure of funding of U.S. politil mpigns, nd, when rried over from prior mpigns, hnges politiins inentives nd legisltive deisions. More generlly, these results shed new light on how det finning deisions ffet inentive onflits in politis. As suh, our pper is relted to the lrge literture on geny reltionships, espeilly inside firms, nd on the role tht det finning plys in ffeting different firm stkeholders (see, e.g., Myers (1977), Jensen nd Mekling (1976), Jensen (1986), Ross (1977)). Seond, our pper ontriutes to the growing literture on the interreltion etween politis nd finne. Muh of this literture fouses on whether politil onnetions (e.g., Fismn (2001), Fio (2004), Goldmn, Roholl, nd So (2009)) or mpign ontriutions (e.g., Cooper, Gulen, nd Ovthinnikov (2009), Akey (2013), Ovthinnikov nd Pntleoni (2012)) mtter for firm vlue, nd on the hnnels through whih politil onnetions ffet firm vlue (e.g., Duhin nd Sosyur (2011), Amore nd Bennedsen (2012), Correi (2012), Akey (2014)). Other reent ppers show how politil onnetions nd networks mtter for legisltors votes (e.g., Cohen, Diether, nd Mlloy (2013), Cohen nd Mlloy (2014)). The ontriution of our pper is to demonstrte tht the presene of det finning nd the ssoited geny onsidertions re ruil element for understnding legisltors hoies. Third, our reserh dds to the politil siene literture tht nlyzes the effets of politil ontriutions on legisltive outomes (see e.g., Ansolhere, de Figueiredo, nd Snyder (2003) nd Strtmnn (2005) for exellent reviews)). Bsed on our reding of the literture, there is no ler onsensus to dte whether outside money mtters for legisltive outomes, with some ppers finding positive ssoition etween the two while other ppers (often using more sophistited eonometri tehniques) finding no orreltion etween money nd votes. The results in our pper undersore the importne of tking into ount det-indued inentives when studying the reltion etween money nd votes. We show tht when those inentives re tken into ount, those politiins who hve greter inentives to trde votes for money indeed re muh more sensitive in their voting deisions to ontriutions reeived from speil interest groups. The pper proeeds s follows. Setion I provides n overview of the institutionl detils nd the rules tht govern det finning in politil mpigns. Setion II desries the dt nd presents the desriptive sttistis. Setion III presents the results of future fundrising hoies of indeted politiins. Setion IV presents the results on the voting tests. Setion V onludes. 6

8 I. Institutionl detils Det is mjor soure of mpign finning. Figure 1 shows tht ndidte nd outside lons to politil mpigns totl $1.9 illion in 2014 dollrs over the period preeded only y individul ontriutions tht totl $11.2 illion. Det s soure of funding exeeds orporte ontriutions, trde, memership, nd orgniztion in helth field (T/M/H) ontriutions, lor ontriutions, ndidte ontriutions, nd non-onneted orgniztions ontriutions. Det lso exeeds the mount of independent expenditures (for nd ginst ndidtes) nd ll ommunition ost expenditures. 4 Clerly, det is mjor soure of mpign finning. We therefore sk wht the onsequenes re of det finned mpigns for future mpign fundrising, for legisltors inentives nd ultimtely for their deision-mking while in offie. To do so, we first desrie the mpign finne regultions tht govern the issune nd repyment of det mde y politil ndidtes. < Insert Figure 1 out here > The relevnt mpign finne rules re summrized in the Code of Federl Regultions, Title 11, Suhpter A, Prt 116, Dets Owed y Cndidtes nd Politil Committees. Politil ndidtes re llowed to mke unlimited politil ontriutions nd/or lons to personl politil mpigns. Cmpigns re lso llowed to orrow funds from outside orgniztions sujet to ontriution limits set y the Federl Eletion Commission. The lons must e repid in ordne with the proedure s desried in the ove regultion. Outside det my e repid from ontriutions to the ndidte or the ndidte s uthorized ommittee efore, on, or fter the eletion dte provided tht ontriutions re lerly mde for the purpose of lon repyment. There is no p on the mximum mount of outside det tht n e repid, even fter the eletion dte. The rules re somewht different s regrds lons mde y politil ndidtes to their personl politil mpigns. The pssge of the Biprtisn Cmpign Reform At of 2002 (lso known s the MCin-Feinhold Bill) introdued limit on the repyment of ndidte lon. Speifilly, the pssge of the lw limits the repyment of ndidte s personl lon to $250,000 from ontriutions mde to the ndidte or ny uthorized 4 Cmpigns differ signifintly in the wy they re finned. Some mpigns re finned lmost exlusively with individul ontriutions, while others rely hevily on det. Setion III desries the finning ptterns in detil. 7

9 ommittee of the ndidte fter the eletion. 5 Tht is, similr to outside lons, ndidte lons of $250,000 or less my e repid from ontriutions to the ndidte or the ndidte s uthorized ommittee efore, on, or fter the eletion dte provided tht ontriutions re lerly mde for the purpose of lon repyment. For ndidte lons in exess of $250,000, however, the ndidte s uthorized ommittee my repy the entire lon mount y ontriutions mde to the ndidte or the ndidte s uthorized ommittee only efore or on the eletion dte. The uthorized ommittee my repy up to $250,000 y ontriutions reeived fter the eletion dte. For the remining lne, the uthorized mpign my use the sh on hnd t the eletion dte to py off the ndidte lon. The pyment must e mde within 20 dys of the eletion, during whih time the differene etween the personl lon in exess of $250,000 nd the sh on hnd used to py off the personl lon must e reported s the ontriution y the ndidte. Any lne remining fter ll pyments re mde is either lost y the ndidte if she loses the eletion or is rried over into future eletion yles. Tle 1 summrizes these regultions with two simple exmples. We onsider typil House of Representtives mpign, whih relies on $53,889 in totl det on verge nd typil Sente mpign, whih relies on $365,573 in totl det on verge. Beuse the verge mount of det in typil House mpign is elow the $250,000 threshold, uthorized House mpigns my rise money efore, on, or fter eletions to py off the det. Winning ndidtes my rry ny unpid det from given eletion yle into future eletion yles. < Insert Tle 1 out here > In ontrst, the verge Sente mpign relies on more thn $250,000 in det, so the entire $365,573 of verge orrowing my e repid in full only from ontriutions reeived efore or on the dte of the eletion. After the eletion, the $115,573 in exess of $250,000 my e pid off with remining sh on hnd or, for winning ndidtes, rried over into future eletion yles. If Sente mpign hs $65,514 of sh on hnd t the end of the mpign (this is the mount of sh on hnd t mpign end for Sente mpign in the 75 th perentile of the distriution), it my use up to tht mount to py off the det within 20 dys of the eletion. Winning ndidtes my rry over the remining $50,059 into future eletion yles. Losing ndidtes, however, 5 See H.R.2356 Biprtisn Cmpign Reform At of

10 forego the olletion of the remining funds. The write off is treted s ndidte ontriution to the mpign. II. Dt A. Dt soures Our smple onsists of ll U.S. House of Representtives nd Sente eletion mpigns for the period Although mpign finning dt goes k to 1979, no dt on ndidte nd outside lons to politil mpigns is ville prior to The smple is n intersetion of severl mpign files mintined y the Federl Eletion Commission (FEC). For eh politil mpign, we first otin dt from the FEC Summry Files on totl mpign fundrising nd expenditures. We use the FEC Post-Eletion Cyle Summry Files for the period nd the Current All Cndidtes Summry Files for the period to otin dt on totl mpign reeipts, trnsfers to nd from uthorized ommittees, totl mpign disursements, eginning nd ending mpign sh, totl individul ontriutions, totl ndidte nd other lons nd lon repyments, nd totl dets owed y the mpign t mpign end. We lso reord ndidte nme, sttus (inument, hllenger, or open re ndidte), sought-fter puli offie, the stte nd distrit for whih the ndidte is running, the ndidte s prty ffilition, nd the eletion outome. The smple onsists of 21,946 House nd Sente mpigns with non-missing dt on totl mpign fundrising nd expenditures. Next, we merge the summry dt with the smple of politil ontriutions mde y Politil Ation Committees (PACs) over our smple period. The PAC ontriutions dt is from the FEC Contriutions to Cndidtes from Committees Detiled Files nd ontins 4,292,583 ontriutions mde y ll FEC-registered PACs to the ove 21,946 mpigns. We follow the FEC methodology nd tegorize ll PACs into eight distint groups sed on the soures of their politil ontriutions: (1) orportions, (2) prty ommittees, (3) lor orgniztions, (4) trde ssoitions, (5) memership orgniztions, (6) non-onneted orgniztions, (7) super-pacs, nd (8) other, whih inludes oopertives nd orportions without pitl stok. 6 The dt on PAC sponsors is from the FEC Committee Mster Files nd inludes identifying informtion for 51,946 6 FEC expliitly identifies orportions (FEC interest group tegory C ), lor orgniztions (tegory L ), trde ssoitions (tegory T ), memership orgniztions (tegory M ), oopertives (tegory V ), nd orportions without pitl stok (tegory W ) in the Committee Mster Files. We identify prty ommittees nd super-pacs from the FEC ommittee type odes (we use odes Y nd X to identify prty ommittees nd ode O to identify super-pacs). We tegorize ll remining PACs s non-onneted orgniztions. 9

11 unique PACs nd their sponsoring orgniztions. For eh ontriution soure, we further group ll politil ontriutions into one of five ontriution types: (1) hrd money ontriutions (FEC trnstion type odes 24K nd 24Z ), (2) independent expenditures for ndidte (ode 24E ), (3) independent expenditure ginst ndidte (ode 24A ), (4) ommunition ost for ndidte (ode 24F ), nd (5) ommunition ost ginst ndidte (ode 24N ), therey reting 40 seprte ontriution soure/type pirs. Eh pir detils the totl mount of politil ontriutions reeived y given mpign from given soure nd of given type. In the finl step, we otin for ll winning mpigns dt on the politiin s ommittee ssignments nd prty rnkings on eh serving ommittee in the upoming Congressionl session. This dt is from Chrles Stewrt s Congressionl Dt Pge. 7 Our finl smple onsists of 21,946 House nd Sente mpigns with suffiient eletion outome dt for 6,708 winning nd 9,231 losing mpigns. B. Desriptive sttistis Figure 1 desries the soures of mpign finning during the period overed y our study. Corroorting well-doumented ft in the mpign finning literture (see, e.g., Theilmnn nd Wilhite (1989), Ansolehere, de Figueiredo, nd Snyder (2003), Cooper, Gulen, nd Ovthinnikov (2010)), individul ontriutions represent y fr the lrgest soure of funding for politil mpigns. Individuls olletively ontriuted $11.2 illion to politil mpigns over our smple period. Remrkly, t $1.9 illion or 10.6 perent of totl mpign finning, det represents the seond lrgest soure of funds, signifintly exeeding orporte ontriutions ($1.2 illion), trde, memership, nd helth orgniztions (T/M/H) ontriutions ($910 million), independent expenditures ($703 million) nd lor ontriutions ($700 million). Despite its ler importne in politil mpigns, the demi literture hs een surprisingly silent on the role of det in politiins future fundrising nd politil deision-mking. < Insert Figure 1 out here > Pnel A of Tle 2 reks mpign finne totls down to the mpign level. The results show tht n verge mpign orrows $87,137 in 2014 dollrs over our smple period. 7 We thnk Chrles Stewrt III for generously providing this dt on his wesite 10

12 Cmpigns rise more from personl nd outside lons thn from orportions ($52,940 on verge), T/M/H orgniztions ($41,487), independent expenditures ($32,016), nd lor orgniztions ($31,876). Remrkly, lmost hlf of ll politil mpigns (46.75 perent) in our smple rely on some form of det finning, nd, onditionl on orrowing funds, mpigns orrow lmost one out of every three dollrs of totl money rised (31.79 perent). Most of mpign det omes in the form of ndidte lons to their own mpigns, lthough one in twelve mpigns (8.24 perent) orrows from outside soures, suh s nks. Outside orrowing ontriutes perent of totl mpign reeipts. The mjority of politil mpigns with orrowed funds do not repy det t the end of the mpign, ut rry it over into future eletion yles. Three qurters of politil mpigns tht orrow funds hve det outstnding t mpign end. Wht is even more surprising is tht lmost one in five mpigns (18.29 perent) hs enough sh on hnd to retire the existing det t mpign end ut hoose not to do it. Importntly, one rried over, mpigns do not let det linger on ut tively work on its retirement. The verge det mturity is less thn three yers in our smple (2.72 yers), whih, when ompred to the verge mpign life (unreported 6.98 yers), shows tht mpigns rely signifintly on future mpign funds to py off prior mpign det. < Insert Tle 2 out here > There pper few meningful differenes in the use of det ross Repulin nd Demort mpigns in olumns 2 nd 3 s well s ross the House nd the Sente mpigns in olumns 4 nd 5. We do find tht Demorts nd House ndidtes re less likely to rely on ndidte lons nd, onditionl on orrowing, orrow less in nominl dollrs nd s perentge of totl rised funds. Despite eing sttistilly signifint, however, the results pper eonomilly trivil. We lso find tht ndidtes from oth prties nd oth hmers re eqully likely to rry over existing det into future mpigns, lthough oth Demorts nd House ndidtes re less likely to retire existing det if they hve enough sh on hnd. Consistent with this, House ndidtes hve det with signifintly longer verge mturity. However, the differenes re eonomilly smll. In ontrst, we find signifint differenes in the use of det y inument politiins mpigns ompred to hllenger nd open re ndidtes mpigns. In olumns 6-8, 11

13 inuments s group re signifintly less dependent on det finning ompred to hllengers nd open re ndidtes. Inuments olletively rised mere $118 million in det finning over our smple period, ompred to $897 million eh for hllengers nd open re ndidtes. This is not result of fewer inuments in our smple. Rther, inuments on verge rise signifintly less det ($17,615 for inuments ompred to ($86,812 nd $182,335 for hllengers nd open re ndidtes, respetively). Compred to inument mpigns, hllenger nd open re mpigns re five times more likely to orrow funds from their own ndidtes nd twie more likely to orrow from outside soures. Moreover, reltive to inument mpigns, indeted hllenger nd open re mpigns re four times more relint on own ndidte det finning nd lmost three times more relint on outside det for mpign funds. These differenes re sustntil nd show tht det in politil mpigns is onentrted mong newomer politiins. Finlly, the results in Pnel A of Tle 2 show tht inuments differ from other ndidtes in their tretment of existing det. Inuments re muh more likely to rry existing det into future mpigns even if they hve enough sh on hnd to retire it. As result, the verge det mturity in inument politil mpigns is two to three times longer thn the verge det mturity in hllenger nd open re mpigns. Pnels B nd C of Tle 3 dig deeper nd present the results seprtely for winning nd losing mpigns. Most hllengers nd open re ndidtes lose Congressionl eletions, so det my hve little impt on future fundrising nd politil deision-mking if it is onentrted mong losing mpigns. Pnel B presents the results for winning mpigns; pnel C presents the results for losing mpigns. The results show tht det is present in oth types of mpigns, lthough it is more onentrted in losing mpigns. For every dollr of det in politil mpigns, 26.5 ents (or $377 million in totl) is rised y winning mpigns nd 73.5 ents (or $1.048 illion in totl) is rised y losing mpigns. Our interprettion of this result is tht despite higher onentrtion mong losers, winning politiins do ring sustntil mounts of det into puli offie. Compred to losing mpigns, winning mpigns re less likely to rise det, either from own ndidtes or outside soures, nd, onditionl on orrowing funds, winning mpigns orrow less in nominl dollrs nd s perentge of totl rised. Winning mpigns re less likely to py off det t mpign end even if they hve enough sh on hnd to do it, whih results in verge det mturities tht re signifintly longer ompred to those of losing mpigns. 12

14 In ddition to studying the onentrtion of det mong inuments, hllengers, nd open re ndidtes in winning nd losing eletions, we lso nlyze det onentrtion in more nd less expensive mpigns. We sort ll mpigns into quintiles sed on totl funds rised nd report det hrteristis seprtely for eh quintile. Tle A.1 of the Online Appendix shows tht, t $1.3 illion or 69.5 perent of the totl, the most expensive mpigns indeed ount for the ulk of the det issues. However, we find tht with the exeption of the lest expensive mpigns, mpigns re signifintly less likely to rely on det nd, onditionl on orrowing, orrow signifintly less s perentge of totl rised funds s they eome more expensive. Det is tully more widespred nd is more importnt soure of funding in less expensive mpigns. Finlly, we fous on the susmple of indeted mpigns nd ompre hrteristis of mpigns reeiving more or less thn $250,000 in ndidte lons. Beuse of regultion tht govern the repyment, lons in exess of $250,000 re espeilly ostly, so politiins willing to lend lrge sums to their own mpigns my do so to signl their privte informtion out the proility of winning. Indeed, the results in Tle A.2 of the Online Appendix show disproportionlly higher onentrtion of open re ndidtes mong the set of politiins who lend their mpigns in exess of $250,000 ompred to other indeted politiins. We find tht 45 perent of ll politiins who lend their mpigns in exess of $250,000 re open re ndidtes, ompred to only 29.4 perent for politiins with smll lons. Cndidte signling is espeilly vlule in open res tht fe the highest unertinty, so the disproportionte lustering of open re ndidtes with lrge personl lons to their mpigns is onsistent with signling hypothesis. 8 Turning to time-series evidene, Figure 2 nlyzes intertemporl ptterns in det finning of politil mpigns. Pnel A shows tht det finning hs grown signifintly over our smple period from totl of $43 million in the eletion yle to pek of $234 million in the yle efore delining to $204 million in the yle nd $105 million in the yle. Pnel B, whih trks the verge mount of det per politil mpign, losely mirrors the results in pnel A. In pnel C, there is slight deline in the propensity of politil mpigns to use det, either from ndidtes or outside soures, ut the hnges pper eonomilly trivil. However, the results in pnel F show tht, onditionl on orrowing, 8 See Ross (1977) for signling theory of det. In the model, higher level of det redily signls high future profitility regrding the firm. 13

15 mpigns hve tully inresed the proportion of totl funds rised through det, nd the inrese is prtiulrly pronouned for outside lons. In 1984, indeted mpigns orrowed on verge 26 perent of totl funds from ndidtes nd nine perent from outside soures. Those perentges inresed to 37 nd 18 perent, respetively, y the end of our smple period. Indeted mpigns re signifintly more indeted tody ompred to the erly 1980s. The results in pnels D nd E lso show tht mpigns tody re muh more likely to rry over existing det into future mpigns even if they hve enough sh on hnd to py it off t mpign end, whih results in longer verge det mturities in reent politil mpigns. < Insert Figure 2 out here > Overll, the results in this setion show tht det is mjor soure of finning of politil mpigns nd tht its importne hs grown over time. C. Where does the sh for ndidte lons ome from? There re different wys how ndidte n finne her mpign with ndidte lon. Tle 3 presents two senrios. In the first senrio, the ndidte n use her personl funds (sh) to mke lon to her mpign. In this se, the liility side of the personl lne sheet remins unhnged, nd the ndidte lon represents hnge in the omposition of the sset side. The onsequene is tht the ndidte holds lim on the future sh flows of his politil mpign. Compred to mking personl ontriution to his mpign, the politiin mintins the option to py himself k lter. We hek how often ndidtes onvert ndidte lons into mpign ontriutions. It hppens very infrequently. We hve 9,708 politiin-yles where politiins lend money to their own mpign. In only 37 instnes, the politiin onverts t lest portion of his own lon to the mpign into mpign ontriution. In only 11 ses, the entire lon is onverted into mpign ontriution. These numers suggest tht the lons remin on the lne sheet of the politiin most of the time until they re repid. < Insert Tle 3 out here > 14

16 An exmple of the first senrio is the Demorti House Representtive Gre Npolitno. 9 She ssumed offie in Jnury 1999, representing the 34 th distrit of Cliforni. During the eletion mpign in 1998, she provided severl lons totling $220,000 to her own mpign. The sh for these lons me from her own funds. Interestingly, she then strted hrging n interest rte of 18% on those ndidte lons. Tht is, she used mpign ontriutions to py for the interest on her lons. Over the yers, she olleted more thn $ in interest. By the end of 2010, she hd repid the lons with ontriutions tht she hd reeived from other soures. In the seond senrio, the ndidte tkes out personl lon, nd then uses (prt of) the pitl from the personl lon to mke lon to her mpign. In this se, the personl lne sheet of the politiin inreses y the mount of the nk lon. As in the first senrio, the ndidte holds lim on the future sh flows of his politil mpign. A se in point for this type of rrngement is Eri Crwford, the U.S. Representtive for Arknss first ongressionl distrit. He wins the generl eletion in 2010 nd ssumes offie in Jnury During the mpign in 2010, he tkes out lon with Heritge Bnk on Mrh 30, 2010, pledging ertifite of deposit s ollterl. On the sme dy, he lends $70,000 to his own mpign. The mpign repys the lon on Otoer On the sme dy, he lends gin $70,000 to his own mpign, ut this time hrging interest on the lon. On Novemer 22, 2010, he ollets $7,400 in interest nd prinipl from his mpign. At the end of the yer, he sells the ertifite of deposit to py off the personl lon, nd the politil mpign still hs lon outstnding of $66,200. In this exmple, Crwford uses personl ollterl to tke out personl lon, nd then uses the proeeds from the personl lon to mke lon to his own mpign. Wht is ommon to oth senrios is tht the ndidte holds lim on the sh flows of her politil mpign. To inrese the proility of repyment, oth senrios hve the potentil to ffet the inentives of how politiins rise future funds nd mke deisions while in offie. 9 The dt for this nd the next exmple ome from FEC filings nd from the finnil dislosure reports tht ndidtes re oliged to file with the Offie of the Clerk of the House of Representtives. The reports re ville t: 15

17 III. Fund rising of indeted politiins In this setion, we nlyze how indeted politiins rise funds in future politil mpigns. We first nlyze whether indeted politiins rise more funds ompred to det-free ounterprts in susequent eletion. Furthermore, we investigte whih PACs provide most of the funding. A. Differenes in fund rising etween indeted nd det-free politiins In this setion we investigte how the presene of det finning in politil mpign reltes to future mpign fund rising. Speifilly, we sk whether politiins with det from previous mpigns rise more money or money from different soures in susequent eletions. If indeted politiins wnt to repy the det, we expet tht they rise more funds from other soures in the future. To investigte this hypothesis, we first ompre verge mpign totls for politiins with no det in prior mpigns (Pnel A of Tle 4) to totls for indeted politiins (Pnel B). We oserve tht the indeted politiin genertes more totl reeipts on verge, reeives more PAC ontriutions, hs less sh, nd retires more det in susequent mpigns. This univrite omprison suggests tht there re signifint differenes in future mpign finning etween politiins with nd without det outstnding. To investigte the reltion more formlly, we estimte the following model: log(totl m ) jt,m={beginning sh, Totl reeipts, Individul ontriutions, PAC ontriutions, Det issues, Det retirement, Totl disursements, Ending sh} = α j + α t + β(detholder) jt 1 + γx jt + ε jt, (1) The dependent vrile is the logrithm of the money rised y politiin from different soures. Detholderjt-1 is n inditor vrile set to one for politiins with positive det outstnding from prior mpigns nd zero otherwise. j nd t re politiin nd yer fixed effets, respetively. Xjt is vetor of ontrol vriles tht inludes (i) the perentge of votes reeived in the generl eletion in the prior mpign, (ii) the urrent politiin rnk in the Congressionl hmer, (iii) vetor of inditor vriles for eh Congressionl ommittee tht politiin sits on, nd (iv) stte yer fixed effets. The oeffiient of interest is β. It ptures, in perentges, the differene in funds rised etween politiins with nd without det from the previous mpign. We luster the stndrd errors t the politiin level. 16

18 < Insert Tle 4 out here > Pnel C of Tle 4 shows the oeffiient on Detholderjt-1 for the different susmples. In olumn 1, for instne, the oeffiient on Detholderjt-1 is negtive for ll rows, suggesting tht politiins with det from the previous mpign hve lower levels of sh t the eginning of the mpign ompred to politiins without det. Fousing on row one, the oeffiient on Detholderjt-1 is signifintly positive for totl reeipts, individul ontriutions, nd PAC ontriutions. In other words, politiins with det from the previous mpign rise more reeipts overll (olumn 2), more money from individuls (olumn 3), nd more money from PACs (olumn 4). The eonomi mgnitudes of these estimtes re lrge. Indeted politiins rise 11.91% more from individuls in susequent eletions, 14.27% more from PACs, nd 14.13% more overll funds ompred to politiins without det. Indeted politiins lso issue signifintly less det (olumn 5) nd retire signifintly more det in susequent mpigns (olumn 6). Overll, this pttern is onsistent with the hypothesis tht indeted politiins hve to rise money from other soures to repy the mpign det. Rows 2 nd 3 show the split etween House nd Sente ndidtes, nd rows 4 nd 5 the split etween Demorts nd Repulins. The results ross these susmples lrgely mirror the results of the full smple: indeted politiins sustitute wy from det to other soures of mpign finning suh s individul or PAC ontriutions. Note tht there re only few oservtions for the Sente, so tht the sttistil power of the estimtes in the third row is low. It is importnt to stress tht these regressions inlude time nd politiin fixed effets, ontrol vriles, nd stte yer fixed effets. With this setting, we fous on within politiin hnges in fundrising over time nd ontrol for time-invrint politiin hrteristis tht ould e relted to fundrising ehvior. The time fixed effets sor shoks ffeting ll politiins eqully. The setting lso llows ontrolling for eonomi onditions in given stte nd yer tht ould e orrelted with oth the politiins indetedness nd the mount of money they n rise in politil mpign. While the estimted models do not llow mking usl lims or sttements, the reported onditionl orreltions show tht the presene of det is signifintly relted to politiin s future fundrising ehvior. 17

19 B. Fundrising from Politil Ation Committees The results in Tle 4 suggest tht politiins with det rise more funds from PACs in susequent eletions (olumn 4 of Tle 4). In Tle 5, we refine the nlysis to understnd where these PAC ontriutions ome from. Speifilly, we split PAC ontriutions y soure (orporte, prty, lor, trde, memership, non-onneted, super PACs, nd other) nd y type (hrd money, independent expenditures, nd ommunition osts). We then run dditionl tests to show tht det finning is signifintly relted to future funds oming from speifi PACs. In Tle 5, we first split ll PAC ontriutions y soure or type nd report the verge mounts rised in eh susmple for politiins with no det from prior mpigns (Pnel A) nd for indeted politiins (Pnel B). On verge, indeted politiins hve signifintly higher ontriutions from prty, lor, trde, nd non-onneted PACs ompred to politiins with no det. Indeted politiins do not, however, hve higher verge ontriutions from orporte, memership, or super PACs. When it omes to the types of PAC ontriutions, we oserve tht, on verge, indeted politiins reeive higher ontriutions for independent expenditures nd for ommunition osts, oth for the ndidte. < Insert Tle 5 out here > To formlly investigte the reltion etween PAC ontriutions nd the presene of det, we estimte the sme speifition (1) ut reple the dependent vrile with the logrithm of money rised from PACs split y soure or type. Pnel C presents the oeffiients of the Detholderjt-1 dummy. In the first row, the oeffiient on Detholderjt-1 is positive nd sttistilly signifint for orporte, prty, lor, trde, memership, non-onneted, nd other PACs. In other words, indeted politiins reeive signifintly more ontriutions from those PACs ompred to det-free politiins. The results re lso eonomilly signifint. For instne, the oeffiient on Detholderjt-1 is in olumn 1 for orporte PACs, implying tht politiins with det reeive 13.37% more from orporte PACs ompred to politiins without det. Similrly, indeted politiins rise 14.34% more money from lor PACs ompred to politiins without det (olumn 3). Interestingly, the split etween Demorts nd Repulins (rows 4 nd 5) shows tht the differene in orporte, prty, nd lor PAC ontriutions is sttistilly signifint for Demorts only, nd not for Repulins. This result is expeted for lor PACs, sine Demorts re known to more strongly support lor unions. But it seems tht the differene in fundrising 18

20 etween politiins with nd without det is lso lrger for Demorts thn Repulins when it omes to orporte nd prty PACs. For the type of PAC ontriutions, we oserve tht the oeffiient on Detholderjt-1 is positive nd sttistilly signifint for hrd money ontriutions nd for ommunition osts for the ndidte. Tht is, politiins with det from prior mpigns rise more in the form of hrd money ontriutions nd ommunition osts ompred to politiins without det. Overll, these results suggest tht politiins with det intensify efforts tht llow them to rise more money from PACs so tht they n py off their det. 10 IV. Voting deisions of indeted politiins In this setion, we nlyze how legisltive ehvior of indeted politiins differs from tht of their det-free ounterprts. Speifilly, we nlyze whether indeted politiins exhiit heightened sensitivity of their voting deisions to politil ontriutions reeived from the ffeted speil interest groups. Evidene in the ffirmtive would e onsistent with the vote pledging hypothesis. To minimize ny onerns out dt mining nd the generlity of our onlusions, we nlyze indeted politiins voting deisions in three distint settings. In the first series of tests, we fous on voting on lor-relted legisltion. In the seond series of tests, we nlyze voting on trde-relted legisltion. In the third test, we swith to nlyzing votes on the finnil servies legisltion. To preview the results, in ll three tests, we provide strong support for the vote pledging hypothesis. We find little supporting evidene for the lignment hypothesis. A. Lor voting Our first set of experiments nlyzes indeted politiins voting ptterns on lor-relted legisltion. We follow stndrd methodology in the politil siene literture (Ansolehere, et l. (2003)) nd exmine the effets of politil ontriutions on roll ll votes st y indeted nd det-free memers of Congress. Our dependent vrile is the roll ll voting sore omputed y the Amerin Federtion of Lor Congress of Industril Orgniztions (AFL-CIO) for the period Similr to mny interest groups, AFL-CIO identifies ills in eh Congressionl session tht it onsiders espeilly importnt to its interests nd omputes the 10 In Tle A.3 of the Online Appendix, we investigte further whether ndidtes rise money from lrger numer of PACs or lrger mounts from existing PACs. We find tht indeted politiins re suessful in signifintly inresing the numer of PAC ontriutors ompred to politiins without det. Moreover, politiins with det from prior mpigns reeive signifintly lrger ontriutions from lor nd trde PACs ompred to politiins without det. 19

21 perentge of times tht eh lwmker votes with the group. 11 The voting sore, rnging from 0 to 100, is omputed for eh lwmker-congressionl session nd trks politiin s lignment with the views of the Federtion of Lor. We estimte models tht relte the lor voting sore of eh politiin to politil ontriutions reeived from lor, trde, nd orporte PACs s well s the intertions of those ontriutions with the detholder inditor: LVS jt = α j + α t + αd jt 1 + β C m jt + γ m m C jt m D jt 1 + δx jt + ε jt (2) LVSjt is the lor voting sore for politiin j in Congressionl session t, j nd t re politiin nd Congressionl session fixed effets, respetively, Djt-1 is n inditor vrile set to one if politiin j hs positive det outstnding from the prior mpign nd zero otherwise, C m jt is the logrithm of the proportion of politiin j s totl mpign finning rised from Lor, Trde, nd Corporte PACs (m = {Lor, Trde, Corporte}), nd Xjt is vetor of ontrol vriles tht inludes (i) the perentge of votes reeived y politiin j in the prior generl eletion, (ii) politiin j s urrent politil rnk in the Congressionl hmer, (iii) vetor of inditor vriles for eh Congressionl ommittee ssignment wrded to politiin j, (iv) politiin j stte-congressionl session fixed effets, nd (v) nd ontrols for other ontriutions reeived. The oeffiient of interest is γ, whih mesures the inrementl sensitivity of indeted politiins voting deisions to politil ontriutions reeived from lor nd other PACs. Under the vote pledging hypothesis, the γ oeffiient is expeted to e positive. Note tht positive γ oeffiient my lso e onsistent with the lignment hypothesis if lor PACs ontriute more to politiins who represent Congressionl Distrits (CDs) with hevier presene of orgnized lor. Tle 6 presents the results. Pnel A shows seline speifitions of the reltion etween PAC ontriutions nd lor voting. Consistent with prior studies (e.g., Ku nd Ruin (1981), Sltzmn (1987), Wilhite nd Theilmnn (1987), Neustdtl (1990)), the results in models 1 nd 4 show tht politil ontriutions from lor unions re ssoited with higher lor voting sores, lthough the effet is eonomilly not tht strong. A one-stndrd devition inrese in lor ontriutions (2.01 in log proportion of totl funds rised) is ssoited with 0.48% inrese in 11 For exmple, on April 30, 2014, the Sente voted on S.2223 (Minimum Wge Firness At) tht would hve inresed the federl minimum wge from $7.25 to $10.10 y The ill ws rejeted y the mrgin. 20

22 the lor voting sore. Compred to the men lor voting sore of 53.55% in our smple, the results re trivil. In models 2, 3 nd 4, we find no reltion etween trde or orporte politil ontriutions nd lor voting. The remining olumns present the results seprtely for eletion nd non-eletion yers. The positive reltion etween lor ontriutions nd lor voting is onentrted in non-eletion yers, presumly euse it is esier for lwmkers not to ttrt undue ttention from lol onstituents. < Insert Tle 6 out here > Pnel B presents the inrementl sensitivity of lor voting deisions to PAC ontriutions for indeted politiins. Consistent with the vote pledging hypothesis, indeted politiins re signifintly more sensitive to lor ontriutions in their lor voting deisions. A one-stndrd devition inrese in lor ontriutions is ssoited with 0.42% (1.13%) inrese in the lor voting sore of det-free (indeted) politiins. The differenes re even stronger in non-eletion yers when the sme inrese in lor ontriutions produes 0.46% inrese in the lor voting sore of det-free politiins nd 2.20% inrese in the lor voting sore of indeted politiins. To put these numers in perspetive, the AFL-CIO lor voting sores re omputed sed on lwmkers votes on totl of 252 ills in the House nd the Sente in non-eletion yers during our smple period. This mens tht n indeted politiin is expeted to vote pro-lor on 5.6 dditionl ills for every one-stndrd devition inrese in lor ontriutions, ompred to 1.2 dditionl ills for det-free politiins. These differenes re meningful. We repet the nlysis seprtely for House nd Sente memers nd for Demorts nd Repulins. The results, presented in Tle A.4 in the Online Appendix, show tht the reltion etween lor ontriutions nd lor voting for indeted politiins is onentrted mong House memers nd mong Demorts. The results in Tle 6, while ertinly onsistent with the vote pledging hypothesis, nnot yet e used to rule out the lignment hypothesis. It is possile tht lor PACs simply trget indeted politiins who represent CDs with hevier presene of orgnized lor, in whih se, the positive oeffiient on the intertion of lor PAC ontriutions with the detholder inditor simply reflets the inresed supply of lor ontriutions to indeted politiins nd the ltter s lignment with lol onstituents in their voting deisions. To exmine this possiility formlly, 21

23 we perform the following test. We prtition ll CDs into lor unioniztion teriles, with CDs with the lowest lor unioniztion rtes pled in terile one nd CDs with the highest lor unioniztion rtes pled in terile three. 12 Under the lignment hypothesis, we expet the inresed sensitivity of lor voting deisions to lor ontriutions for indeted politiins to e stronger in higher lor unioniztion CDs. Figure 3 shows the geogrphi distriution of low nd high lor unioniztion CDs ross the U.S. in 2010 (the results re similr in other yers). < Insert Tle 7 out here > Tle 7 presents the results of estimting eqution (2) seprtely for politiins representing low nd high lor unioniztion CDs. Severl results stnd out. First, the oeffiient on the detholder inditor is never signifint in pnel B, whih mens tht indeted politiins vote no differently on lor legisltion ompred to their det-free ounterprts. This evidene is inonsistent with the lignment hypothesis. The results lso show tht, while det-free politiins exhiit similr sensitivity of their lor voting deisions to ontriutions from lor unions, indeted politiins re signifintly more sensitive to lor ontriutions ut only in low lor unioniztion CDs, whih is lso inonsistent with the lignment hypothesis. In high unioniztion CDs, the reltion is tully the opposite, whih lso runs ginst the lignment hypothesis. In terms of eonomi mgnitudes, one-stndrd devition inrese in lor ontriutions is ssoited with 1.01% inrese in the lor voting sore of det-free politiins from low unioniztion CDs nd muh higher 3.77% inrese in the lor voting sore of indeted politiins from the sme res. The differene is eonomilly signifint. We repet our nlysis splitting the smple into eletion nd non-eletion yers nd otin similr results (ville upon request). In sum, the lor voting tests show tht indeted politiins re signifintly more sensitive in their lor voting deisions to politil ontriutions from lor unions. The reltion is muh 12 Lor unioniztion dt t the industry level is from Hirsh nd Mpherson (2003). We use the U.S. Census County Business Ptterns dt to lulte the totl industry employment for eh U.S. ounty, nd the totl numer of employees who re memers of lor unions sed on Hirsh nd Mpherson lor unioniztion dt. The ounty employment nd lor unioniztion dt is then mpped into Congressionl Distrits (CDs) using the entroid methodology in Ovthinnikov nd Pntleoni (2012). The lor unioniztion rte t the CD level is omputed s the rtio of totl employees who re memers of lor unions to totl employees. 22

24 stronger for politiins representing low lor unioniztion CDs, whih is inonsistent with the lignment hypothesis. The results re onsistent with the vote pledging hypothesis. B. Trde voting Our seond set of tests fouses on trde-relted legisltion. We dopt the sme methodology s in setion IV.A nd estimte models tht relte the trde voting sore of eh politiin to ontriutions reeived from lor, trde, nd orporte PACs s well s their intertions with the detholder inditor. The trde voting sore is omputed similrly to the lor voting sore using roll ll voting dt on trde relevnt legisltion trked y the U.S. Chmer of Commere for the period As in setion IV.A, we re interested in whether indeted politiins exhiit inresed sensitivity in their trde voting deisions to ontriutions reeived from lor, orporte nd, espeilly, trde PACs. Tle 8 presents the results. In pnel A, the results re onsistent with prior studies (see, for exmple, Mrks (1993)) nd show tht politiins on verge vote more pro-trde when they reeive higher politil ontriutions from trde PACs. The positive reltion is onentrted in non-eletion yers, nd the prmeter estimtes indite tht one-stndrd devition inrese in trde ontriutions is ssoited with 1.15% % inrese in the trde voting sore. Compred to the unonditionl men trding voting sore of 63.17% in our smple, the results pper eonomilly smll. Consistent with Ansolehere, et l. (2003), there is no reltion etween lor nd orporte PAC ontriutions nd trde voting (see olumns 4, 8, nd 12). < Insert Tle 8 out here > The results in pnel B re muh stronger nd show tht indeted politiins exhiit signifintly higher sensitivity in their trde voting deisions to ontriutions reeived from lor, trde, nd orporte PACs. In model 4, indeted politiins vote signifintly less pro-trde if they rise more funds from lor nd orporte PACs nd signifintly more pro-trde if they rise funds from trde PACs. A one-stndrd devition inrese in lor nd orporte ontriutions dereses the trde voting sore of det-free politiins y 1.43% nd 0.21%, respetively, while the sme mgnitude inrese in trde ontriutions inreses the trde voting sore of det-free politiins y 2.42%. By omprison, the sme inrese in lor nd orporte ontriutions dereses the trde voting sore of indeted politiins y 5.73% nd 8.42%, respetively, while 23

25 the sme mgnitude inrese in trde ontriutions inreses the trde voting sore y 9.78%. These numers imply tht of the 189 ills used y the U.S. Chmer of Commere to lulte trde voting sores in our smple, det-free politiin is expeted to vote nti-trde on dditionl ills for every one-stndrd devition inrese in orporte nd lor ontriutions nd pro-trde on 4.57 dditionl ills for every one-stndrd devition inrese in trde ontriutions. The numers jump to dditionl ills for orporte nd lor ontriutions nd dditionl ills for trde ontriutions when we fous on indeted politiins only. The susmple nlysis for House nd Sente memers nd for Demorts in Repulins, presented in tle A.5 in the Online Appendix, shows tht the effets doumented in tle 8 re onentrted mong House memers nd, for trde nd orporte PAC ontriutions, mong Demorts. We next proeed s in setion IV.A to nlyze the possiility tht the ove results reflet the lol onstitueny effet, i.e. the tendeny of speil interest groups to trget politiins who re nturlly predisposed to vote pro- or nti-trde euse of the lol onstituents preferenes. We ondut two sets of tests. First, we go k to our prtitioning of politiins into those representing low lor unioniztion CDs nd high unioniztion CDs. It is possile tht the prtiulrly negtive reltion etween lor ontriutions nd trde voting sores for indeted politiins omes from politiins in high lor unioniztion CDs who re more likely to hold ntitrde positions nd who re lso more likely to reeive more funds from lor PACs. This ehvior would e onsistent with the lignment hypothesis. The results in the first three olumns of Tle 9 show tht this is not the se. First, there is no evidene tht indeted politiins who represent high lor unioniztion CDs re less likely to vote pro-trde s shown y n insignifint oeffiient on the detholder inditor in pnel B. Seond, the inrementl sensitivity of indeted politiins trde voting deisions to ontriutions from lor PACs is very similr ross the lor unioniztion teriles nd is tully insignifint in the high lor unioniztion CDs. < Insert Tle 9 out here > In the seond test, we split politiins sed on whether they represent onstituents who re more or less likely to oppose foreign trde legisltion. Under the lignment hypothesis, indeted politiins should vote pro-trde only if they represent res less hurt or res tht enefit the most from trde. To test this predition, we prtition ll CDs into trde opposition teriles, with CDs with the lowest expeted opposition to trde pled in terile one nd CDs with the highest expeted 24

26 opposition pled in terile three. 13 We then estimte the reltion etween PAC ontriutions nd trde voting seprtely for eh terile. The results in the lst three olumns of Tle 9 show tht indeted politiins representing high trde opposition CDs re indeed more likely to oppose trde legisltion s evidened y the negtive nd signifint oeffiient on the detholder inditor. However, we find no reltion etween the expeted opposition to foreign trde legisltion y lol onstituents nd the sensitivity of politiins voting deisions to ontriutions from trde PACs. The highest sensitivity to trde ontriutions tully shows up in terile two, whih onsist of CDs tht should e more or less neutrl to trde. Thus, the results offer mixed evidene t est in support of the lignment hypothesis. As in setion IV.A, we repet our nlysis splitting the smple into eletion nd noneletion yers nd otin similr results (ville upon request). In the lst set of tests in this setion, we tke loser look t orporte ontriutions nd relte them to trde voting for indeted nd det-free politiins. At first lush, the results in tle 8, whih show negtive reltion etween orporte ontriutions nd trde voting for indeted politiins, my seem ounterintuitive. However, s we show in tle 10, this reltion is onentrted mong those ontriuting firms tht re more likely to e hurt y foreign trde. Bsed on the existing literture (see, e.g., Bin (1956), Sutton (1991), Brrot et l. (2016)), we use four different proxies to sort firms into those tht re more nd less likely to e negtively impted y foreign trde. We use the industry shipping osts, HHI, nd the rtios of R&D-tosles nd dvertising expenditures-to-sles s proxies for opposition to foreign trde, with lower vlues for eh vrile implying more negtive expeted impt from foreign trde nd, therefore, higher opposition to foreign trde legisltion. We sort ll industries into teriles sed on the vlues of eh proxy nd lulte totl ontriutions mde y industry firms in eh terile. We then estimte the reltion etween totl terile ontriutions nd the trde voting sore for indeted nd other politiins (the rest of the vriles re unhnged). < Insert Tle 10 out here > 13 The expeted trde opposition is sed on shipping ost dt used s proxy for import ompetition in Brrot, Loulihe, Plosser, nd Suvgnt (2017). Similr to our methodology for lulting the CD lor unioniztion, we use the U.S. Census County Business Ptterns dt to lulte the totl industry employment for eh U.S. ounty. We then use the industry shipping ost dt to lulte the weighted (y employment) verge shipping ost for eh ounty. The ounty shipping ost dt is mpped into CDs using the entroid methodology in Ovthinnikov nd Pntleoni (2012). CDs with the lowest (highest) shipping osts re res tht re most (lest) sensitive to import penetrtion nd, therefore, re expeted to e the most (lest) opposed to foreign trde legisltion. We thnk Brrot, Loulihe, Plossner, nd Suvgnt for giving us the shipping ost dt. 25

27 The results in Tle 10 show tht the negtive reltion etween orporte ontriutions nd the trde voting sore for indeted politiins is onentrted in those industries tht re more likely to e hurt y trde. The results re roust ross lterntive proxies for identifying industries tht re negtively impted y trde nd show up in eletion nd non-eletion yers. This evidene is onsistent with the vote pledging hypothesis. Overll, the results in this setion provide strong support for the vote pledging hypothesis. Coupled with the evidene on lor voting in setion IV.A, the results lend further redene tht indeted politiins trde voting fvors in return for ontriutions from the ffeted speil interest groups. We ontinue to find little evidene for the lignment hypothesis. C. Finnil servies voting Our finl test fouses on finne-relted legisltion. We follow Strtmnn (2002) nd nlyze the likelihood tht indeted politiins hnge their votes on finne-relted legisltion s funtion of ontriutions reeived from vrious finnil servies firms etween the votes. Strtmnn (2002) provides detiled desription of the institutionl setting, so here we just highlight the min fetures of the experiment. The fous of the test is on the voting ehvior of indeted nd det-free politiins on two very similr piees of finne legisltion deling with the repel of the 1933 Glss-Stegll At, whih limited the tivities of ommeril nks to the enefit of insurne nd investment ompnies. The first vote nlyzed is the roll ll vote on the Brnrd Amendment (onsidered s prt of the 1991 Finnil Institutions Sfety nd Consumer Choie At (H.R. 6)) tht would hve llowed nks to enter the insurne nd investment nking usiness. The ill ws supported y the nking industry ut opposed y the insurne nd investment ompnies. It ws rejeted y vote on Otoer 31, The seond vote nlyzed is the roll ll vote on the 1998 Finnil Servies At (H.R. 10) tht removed ll remining rriers preventing nks from ffiliting with insurne nd investment ompnies. The ill, opposed y the nking industry (euse mny of its provisions were viewed s step kwrd y the nks) ut supported y the insurne nd investment ompnies ws pssed y mrgin on My 13, Given tht the two ills were quite similr in their intended ojetives ut differed in how the nk nd insurne/investment loy pprohed them, Strtmnn (2002) nlyzes whether 26

28 politiins were influened y ontriutions reeived from oth sides nd were more likely to swith their votes, either from the pro-insurne to the pro-nking position or vie vers, s funtion of ontriutions reeived from the ffeted interest groups etween the votes. This test is prtiulrly ttrtive euse ll identifition in the model omes from politiins who swith their votes, so the results nnot e explined y suh time invrint ftors s the politil ideology or prty ffilition of the voting politiin. Consistent with the hypothesis tht politiins trde votes in return for ontriutions, the results in Strtmnn (2002) show tht politiins re more likely to swith their votes to the pro-insurne/investment ompny position if they reeived ontriutions from insurne nd investment ompnies. Conversely, politiins re more likely to swith their votes to the nking position if they reeived ontriutions from the nks. < Insert Tle 11 out here > We extend the Strtmnn (2002) test to inlude n intertion term etween ontriutions reeived from nks nd insurne/investment ompnies nd the detholder inditor vrile. The ltter tkes vlue of one for ll politiins who umulte positive det during the period etween the votes nd zero otherwise. Thus, we re testing whether, ompred to their det-free ounterprts, politiins who eome indeted during the period re even more likely to swith their votes if they reeive ontriutions from nks or insurne/investment ompnies. The results re presented in Tle 11. In the first three olumns, we reprodue the results in Strtmnn (2002). We onfirm tht politiins re more likely to swith their votes to the proinsurne / investment ompny position if they reeive ontriutions from insurne nd investment ompnies nd more likely to swith their votes to the pro-nking position if they reeive ontriutions from nking interests. Importntly, in the lst three olumns we find tht this effet is signifintly mplified for indeted politiins. The results re espeilly strong for investment nd nking ontriutions nd show tht indeted politiins, reltive to their det-free ounterprts, re even more likely to swith their votes if they reeive ontriutions from those speil interests. These results provide strong support for the vote pledging hypothesis. Beuse 27

29 we ontrol for politiin fixed effets (whih inlude the omposition of the lol onstitueny), the results nnot e explined y the lignment hypothesis. 14 V. Conlusions This pper is the first empiril pper to explore the inentives nd implitions of det finning of U.S. politil mpigns. We show tht det is n importnt soure of finne of politil mpigns nd signifintly distorts the deision mking of indeted politiins. We show tht indeted politiins uild reputtion y tering fvorle poliy positions to speil interest groups tht then, in turn, provide mpign funds for reeletion nd to py down the existing det. The results hve fr rehing poliy implitions regrding the finning of politil mpigns. 14 In unreported tests, we onfirm tht the lol onstitueny of voting politiins does not hnge signifintly etween 1991 nd The proportion of lol CD employment in the nking, insurne, nd investment industries is very stle during the smple period. Strtmnn (2002) reports similr findings. 28

30 Referenes Akey, P., Vluing hnges in politil networks: Evidene from mpign ontriutions to lose ongressionl eletions. Review of Finnil Studies 28, Alesin, A. nd Tellini, G., A positive theory of fisl defiits nd government det. Review of Eonomi Studies 57, Amore, M., nd Bennedsen, M., Politil distrit size nd fmily-relted firm performne. Journl of Finnil Eonomis 110, Ansolehere, S., de Figueiredo, J., nd Snyder, J., Why is there so little money in politis? Journl of Eonomi Perspetives 17, Arellno, C. nd Rmnrynn, A., Defult nd the mturity struture in sovereign onds, Journl of Politil Eonomy 120, Bin, J., Brriers to new ompetition. Hrvrd University Press, Cmridge. Brrot J.-N., Loulihe, E., Plossner, M., nd Suvgnt, J., Import ompetition nd household det. SSRN working pper. Behuk, L. nd Jkson, R., Exeutive pensions, Journl of Corporte Lw 30, Cmpell, J. nd Coo, J., Household risk mngement nd optiml mortgge hoie. Qurterly Journl of Eonomis 118, Cohen, L., Mlloy, C., nd Diether, K., Legislting stok pries. Journl of Finnil Eonomis 110, Cohen, L., nd Mlloy, C., Friends in high ples. Amerin Eonomi Journl: Eonomi Poliy 6, Cooper, M., Gulen, H., nd Ovthinnikov, A., Corporte politil ontriutions nd stok returns. Journl of Finne 65, Correi, M., Politil onnetions, SEC enforement nd ounting qulity. Journl of Aounting nd Eonomis 57, Cukiermn, A. nd Meltzer, A. H., A politil theory of government det nd defiits in Neo-Rirdin frmework. Amerin Eonomi Review 79, Duhin, R., nd Sosyur, D., The politis of government investment. Journl of Finnil Eonomis 106, Edmns, A. nd Liu, Q., Inside det. Review of Finne 15,

31 Fio,. M., Politilly onneted firms. Amerin Eonomi Review 96, Fismn, R., Estimting the vlue of politil onnetions. Amerin Eonomi Review 91, Frnk, M. Z., Goyl, V. K., Trde-off nd peking order theories of det. In: Eko, B. E. (Ed.), Hndook of Corporte Finne: Empiril Corporte Finne. North Hollnd, Amsterdm. Goldmn, E., Roholl, J., nd So, J., Do politilly onneted ords dd firm vlue? Review of Finnil Studies 22, Grhm, J. R., Txes nd orporte finne. In: Eko, B. E. (Ed.), Hndook of Corporte Finne: Empiril Corporte Finne. North Hollnd, Amsterdm. Hirsh, B., nd Mpherson, D., Union memership nd overge dtse from the urrent popultion survey: Note. Industril nd Lor Reltions Review 56, Jensen, M., nd Mekling, W., Theory of the firm: Mngeril ehvior, geny osts, nd ownership struture. Journl of Finnil Eonomis 3, Jensen, M., Ageny osts of free sh flow, orporte finne, nd tkeovers. Amerin Eonomi Review P&P 76, Ku, J., nd Ruin, P., The impt of lor unions on the pssge of eonomi legisltion. Journl of Lor Reserh 2, Looney A. nd Ynnelis, C., A risis in student lons? How hnges in the hrteristis of orrowers nd in the institutions they ttended ontriuted to rising lon defults. Brookings Ppers on Eonomis Ativity Fll 2015, Mrks, S., Eonomi interests nd voting on the Omnius Trde ill of Puli Choie 75, Modiglini, F., nd Miller, M., The ost of pitl, orportion finne nd the theory of investment. Amerin Eonomi Review 48, Morse, A., Pydy lenders: Heroes or villins? Journl of Finnil Eonomis 102, Myers, S., Determinnts of orporte orrowing. Journl of Finnil Eonomis 5, Neustdtl, A., Interest group PACsmnship: An nlysis of mpign ontriutions, issue visiility, nd legisltive impt. Soil Fores 69, Ovthinnikov, A., nd Pntleoni, E., Individul politil ontriutions nd firm performe. Journl of Finnil Eonomis 105,

32 Peltzmn, S., Towrd more generl theory of regultion. Journl of Lw nd Eonomis 19, Persson, T. nd Svensson, L.E.O., Why stuorn onservtive would run defiit: Poliy with time-inonsistent preferenes. Qurterly Journl of Eonomis 104, Ross, S., The determinnts of finnil struture: The inentive-signlling pproh. Bell Journl of Eonomis 8, Sltzmn, G., Congressionl voting on lor issues: The role of PACs. Industril nd Lor Reltions Review 40, Song, A., Storesletten, K., nd Ziliotti, F., Rotten prents nd disiplined hildren: A politi-eonomi theory of puli expenditure nd det. Eonometri 80, Stigler, G. J., The theory of eonomi regultion. Bell Journl of Eonomis nd Mngement Siene 2, Strtmnn, T., Cn speil interests uy ongressionl votes? Evidene from finnil servies legisltion. Journl of Lw & Eonomis 45, Strtmnn, T., Some tlk: Money in politis. A (prtil) review of the literture. Puli Choie 124, Sundrm, R. nd Yermk, D., Py me lter: inside det nd its role in mngeril ompenstion. Journl of Finne 62, Sutton, J., Sunk osts nd mrket struture. MIT Press, Cmridge. Theilmnn, J., nd Wilhite, A., The determinnts of individuls mpign ontriutions to Congressionl mpigns. Amerin Politis Reserh 17, Vissing-Jorgensen, A., Consumer redit: Lerning your ustomer s defult risk from wht (s)he uys, Working pper. Wei, C. nd Yermk, D., Investor retions to CEOs inside det inentives. Review of Finnil Studies 24,

33 Figure 1 Soures of mpign finning, This figure shows the ggregte mounts of mpign finning y soure. The smple onsists of ll U.S. House of Representtives nd Sente eletion mpigns for the period All numers re in million USD. 32

34 Millions Millions Millions Pnel A: Totl det 240 Figure 2 Det in politil mpigns desriptive sttistis, Repulins Demorts House Sente Inuments Chllengers Open re Pnel B: Averge det per ndidte/yle 200, , , , , , ,000 80, , , ,000 40, , , Repulins Demorts House Sente Inuments Chllengers Open re Pnel C: % ndidtes with personl (solid) nd other (dshed) det issues Repulins Demorts Repulins Demorts House Sente House Sente Inuments Chllengers Open re Inuments Chllengers Open re 33

35 Figure 2 ontinued Pnel D: % ndidtes w/ end sh > det owed Repulins Demorts House Sente Inuments Chllengers Open re Pnel E: Mturity - ll det (yers) Repulins Demorts House Sente Inuments Chllengers Open re Pnel F: Personl (solid) nd other (dshed) det / totl reeipts Repulins Demorts Repulins Demorts House Sente House Sente Inuments Chllengers Open re Inuments Chllengers Open re 34

36 Figure 3 Lor unioniztion teriles nd lotions of indeted politiins, 2010 This figure shows the geogrphi distriution of low nd high lor unioniztion Congressionl Distrits ross the U.S. in 2010 (the results re similr in other yers). Drker shded Congressionl Distrits re distrits with lrger workfore in lor unions. Cities designted y red dots re hometowns of indeted politiins. 35