Christian Fons-Rosen

Jordi Blanes i Vidal

Mirko Draca

English

Research Papers in Economics

THE POWER OF K STREET:
NEW RESEARCH ON THE
ECONOMICS OF LOBBYING
JORDI BLANES I VIDAL*,
MIRKO DRACA* AND
CHRISTIAN FONS-ROSEN**
Introduction
Political lobbying is as old as government. Indeed, in
the United States,lobbying is protected under the right
of petition in the First Amendment of the Constitution.
While the term originated in Britain – where it was
used to describe the cajoling of MPs in the lobbies of
the House of Commons – nowhere have lobbyists
reached a more evolved state than on “K Street” in
Washington, DC.
In this article we review new research on the econom-
ics of lobbying in the US, focusing on activity at the
Federal level. Significant improvements in data avail-
ability are promising to make this topic a new focus for
empirical political economy research in the next
decade.This promise is also enhanced by Washington’s
dynamic political environment, which offers many op-
portunities for defining novel research designs.
The comprehensive reporting of lobbying expendi-
ture first began with the passing of the 1995 Lob-
bying Disclosure Act (LDA). Since this time the US
federal lobbying industry has experienced startling
growth. Between 1998 and 2009, lobbying expendi-
tures approximately doubled, reaching USD 4 bil-
lion a year. Most recently, the Obama administra-
tion’s attempts to reform the health care and finan-
cial services industries have stimulated lobbying
spending in those sectors. In turn, these recent de-
bates on health care and financial reform have been
marked by sharp criticisms of the role of staffers-
turned-lobbyists in watering down the bills.
A secondary outcome of the LDA has been that it
has made new data available on both the organisa-
tions that spend on lobbying and on the professional
profiles of lobbyists themselves. Independent non-
partisan organisations such as the Center for Re-
sponsive Politics (CRP), the Sunlight Foundation
and Legistorm have played an important role in con-
solidating the raw data released under the LDA and
promoting its availability. So far, we can classify re-
search using this LDA-derived data into two areas:
work on the economics of legislative reform and re-
search on the professional careers of lobbyists. We
consider each of these areas in turn.
The economics of legislative reform
The 2008 financial crisis provides a good setting for
studying the links between lobbying spending and
legislative change. The IMF study by Igan, Mishra
and Tressel (2009) provides a significant contribution
here. They study the relationship between lobbying
by financial institutions and trends in mortgage lend-
ing in the period leading up to the 2008 crisis. Their
analysis has two main strands. Firstly, Igan et al.
(2009) examine whether mortgage lenders who en-
gaged heavily in lobbying also had an ex ante associ-
ation with risk-taking.The propensity for risk-taking
is measured in terms of loan-to-income ratios, pro-
portion of loans sold and mortgage loan growth rates
(i.e., credit expansion). They find that lobbying is
associated with each of these measures. In the sec-
ond strand of the analysis the authors look at lobby-
ing and the ex post performance of mortgage lend-
ers.Here they study area-level delinquency rates and
abnormal stock returns during four financial crisis
events between 2007–08. In both cases they find as-
sociations between lobbying lenders and the given
outcome variables.
Overall, the findings of Igan et al. (2009) are consis-
tent with a moral hazard story, that is, lenders pursu-
ing a strategy of rent-seeking lobbying combined
with subsequent risky lending. This could be sup-
CESifo DICE Report 1/2011 8
Forum
* London School of Economics, London.
** Universitad Pompeu, Fabra, Barcelona.CESifo DICE Report 1/2011 9
Forum
ported either by mechanisms such as (i) the expecta-
tion of preferential treatment by lenders in case of a
crisis (i.e., higher bailout probabilities); or a strategy
of “short-termism”.In the latter strategy lenders lob-
by to create weak regulatory environments that open
up opportunities for short-term gains based on risky
lending structures.While alternative explanations to
the moral hazard approach can be advanced (for
example, that lobbying lenders were also specialised
in riskier areas of the market) additional evidence by
Igan et al. (2009) suggests these alternatives are less
plausible. In summary then, Igan et al. (2009) pro-
vides an in-depth empirical illustration of lobbying
as a rent-seeking activity.
Other recent research in this area has focused on
campaign contributions as a measure of special inter-
est activity.The work by Mian, Sufi and Trebbi (2010)
tracks how mortgage industry campaign contributions
were associated with congressional voting behaviour
on financial bills. This pattern of contributions oc-
curred in tandem with the district-level distribution of
sub-prime borrowers – the mortgage industry target-
ed those legislators whose constituent interests lined
up with their own policy preferences. The paper by
Maheshri (2010) takes a more general look at the leg-
islative process,again using campaign contributions as
a measure of special interests but also focusing on
agenda setting. He argues that the obstruction of bills
in Congressional committees is a major engine of leg-
islative influence by special interests.
Professional careers and the “revolving door”
The movement of political staffers from roles in the
government to lucrative jobs in the lobbying indus-
try is often described as a “revolving door”.This flow
of money and staffers towards Washington’s lobby-
ing firms has led to concerns that corporations and
other organisations are able to buy influence and ac-
quire privileged access to serving politicians.
The existence of the revolving door raises several con-
cerns. Firstly, career concerns in the lobbying industry
can potentially affect the actions taken by serving gov-
ernment officials (Leaver 2009). Secondly, the pro-
spect of post-government monetary windfalls can
change the type of people that are attracted to public
service (Casselli and Morelli 2004;Besley 2005;Keane
and Merlo 2007; Matozzi and Merlo 2008; Kaiser
2009). Thirdly, the disparity of access and influence
over elected representatives creates ethical issues and
perpetuates the impression that political decision-
making is controlled by a tightly knit elite,thus under-
mining popular support for democratic institutions.
The most common criticism of former staffers is that
they are simply trading on their political connec-
tions. But lobbyists often dispute this notion. They
claim instead that their earnings reflect expertise on
policy issues and the inner workings of government
in general.In other words,they argue,it is “what you
know”not “who you know”that matters.Salisbury et
al. (1989) use a survey to argue that policy and pro-
cess knowledge are regarded by lobbyists as more
important than personal connections.
Empirically, the issue of separating the “what you
know” from the “who you know” is a challenge for
researchers.A plausible argument can be made that
former staffers would be high earners even if politi-
cal connections did not matter.The specific problem
here is separating the effects of ability and expertise
on earnings from those of acquired political connec-
tions.Generally,earnings or revenue data only allow
us to observe the effects of both factors together.
In a recent paper, Eggers (2010) provides some evi-
dence that connections to the ruling political party
are particularly valuable. In particular, he finds that
the share of total lobbying revenue pocketed by lob-
byists with political connections to the Democratic
party is higher when the Democratic party controls
Congress and the White House.For ex-staffers,this is
particularly the case in non-ideological issue areas,
whereas for ex-congressmen, the correlation between
control of government and the partisan composition
of lobbying occurs across all issue areas.
One alternative way to identify the effect of revolving
door connections is to look at the impact of a serving
politician’s exit on the lobbying revenues of his or her
former staffers. The point at which a politician leaves
office provides a window for examining the specific
role of political connections.If a politician is no longer
serving in Congress, then the political connection held
by their former staffers should be in effect obsolete.
This is because the politician in question no longer
has direct influence over legislative outcomes or the
content of congressional debates. In turn, this means
that in cases where gaining access is a goal of special
interest groups, lobbying spending will move away
from lobbyists affiliated with exiting politicians and
towards those with still current connections.Blanes i Vidal,Draca and Fons-Rosen (2010) use this
“identification strategy” to estimate the value of po-
litical connections.They find that lobbyists suffer an
average revenue loss of over 20 percent when their
former political employer leaves Congress. In dollar
terms, this translates into USD 177,000 per year for
the typical lobbyist’s practice. Furthermore, this ef-
fect is persistent for at least three years – it seems
that it is difficult for lobbyists to offset the impact of
a lost political connection.
This impact is demonstrated in the Figure which
shows the semester-by-semester change in lobbyist
revenues for the periods before and after a senator
leaves office. The Figure shows that there is a sharp
drop in revenues in the period immediately after the
senator’s exit (more than 25 percent). Furthermore,
there is only a limited “mean reversion” over the
next five semesters.
A key concern of this approach is that their may be
“shared trends”between politicians and their former
staffers-turned-lobbyists. For example, low ability
staffers could sort towards employment with low
ability politicians whose political fortunes may be in
decline. In turn, the revenue shock observed may be
the result of an ongoing downward trend associated
with a particular politician. However, the clear dis-
continuity observed at the point of exit rules out the
presence of such trends.
Further results indicate that that proximity to power
matters for lobbyists. Specifically, the size of the rev-
enue effects increases with the importance of a po-
litician. For instance, senators are more valuable
than representatives and, even within the two cham-
bers of Congress,more senior politicians – defined in
terms of either tenure or committee status – are more
valuable than their junior counterparts. Unsurpris-
ingly, ex-staffers turned lobbyists are more likely to
exit the lobbying industry when their previous em-
ployer has left Congress.
Conclusions and future research
In the US,new data released under public disclosure
laws – in particular Lobbying Disclosure Act (LDA)
of 1995 – has facilitated the development of empiri-
cal research on lobbying and special interest politics.
Notably, non-partisan organisations like the Center
for Responsive Politics (CRP), Sunlight Foundation
and LegiStorm have done further important work
improving access and promoting usage of the data.
This data can potentially be used to provide a check
on the use of power by government officials.
Researchers now have the possibility of combining
datasets across a number of sources to search for sta-
tistical patterns such as those we find for politically
connected lobbyists.As a result, this takes public scru-
tiny to a new level.We can try to find important infor-
mation and behaviours “hidden” in the data. Hence,
one major consequence of laws such as the 1995 Dis-
closure Act is that they make independent research
and evaluation of political questions possible.
Though its focus is on Washington, the emerging re-
search agenda on lobbying and special interests is
relevant to policy-makers and regulators in other
countries.However,this is impeded by a lack of data.
For example, the type of research surveyed in this
article would not be possible in
the UK since the government sim-
ply does not demand the registra-
tion and reporting of lobbying
activity at the same level as in the
US. This has allowed lobbying in
the UK to take place as a sort of
shadow economy, as the recent
“cab-for-hire” scandal – where
Ministers were secretly recorded
selling their service – showed.
While their have been efforts to
improve disclosure in the UK,
Australia and Canada the rela-
tively long history of disclosure
in the US means it will remain
the main focus of research.
CESifo DICE Report 1/2011 10
Forum
-50%
-35%
- %
5%
10%
-5 -4 -3 -2 -1 0 1 2 3 4 5 6
Source: Blanes i Vidal, Draca and Fons-Rosen (2010).
EVOLUTION OF LOBBYIST'S REVENUE AS THE CONNECTED SENATOR 
LEAVES OFFICE
     Lobbyist revenue 
0
change in revenue relative to semester 0
Semesters
senator leaves office between semesters 0 and 1
FigureCESifo DICE Report 1/2011 11
Forum
References
Besley, T. (2004), “Joseph Schumpeter Lecture; Paying Politicians:
Theory and Evidence”, Journal of the European Economic As-
sociation 2, 193–215.
Blanes i Vidal, J., M. Draca, and C. Fons-Rosen (2010), “Revolving
Door Lobbyists”, CEP Discussion Papers No 993, Centre for Eco-
nomic Performance, London School of Economics and Political
Science, London, UK.
Caselli, F. and M. Morelli (2004),“Bad Politicians”, Journal of Pub-
lic Economics 88, 759–782.
Eggers,A. (2010),“The Partisan Revolving Door”, Working Paper,
Harvard University.
Igan, D., P. Mishra and T.Tressel (2009),“A Fistful of Dollars: Lob-
bying and the Financial Crisis”, IMF Working Paper no. 289.
Kaiser, R. (2009), “So Damn Much Money: The Triumph of Lob-
bying and the Corrosion of American Government”, Knof Pub-
lishers, New York.
Keane, M. and M. Antonio (2007), “Money, Political Ambition, and
the Career Decisions of Politicians”,PIER Working Paper no.07-016.
Leaver,C.(2009),“Bureaucratic Minimal Squawk Behavior:Theory
and Evidence from Regulatory Agencies”, American Economic
Review 99, 572–607.
Maheshri, V. (2010), “Kill Bill: Buying the Legislative Agenda”,
Working Paper.
Matozzi, A. and A. Merlo (2008), “Political Careers or Career Po-
liticians?”, Journal of Public Economics 92, 597–608.
Mian, A., S. Amir and F. Trebbi (2010), “The Political Economy of
the US Mortgage Default Crisis”, American Economic Review 100
(5), 1967–98.
Salisbury,R.H.,P.Johnson,J.P.Heinz,E.O.Laumann,R.L.Nelson,
(1989),“Who You Know versus What You Know:The Uses of Gov-
ernment Experience for Washington Lobbyists”, American Journal
of Political Science 33, 175-195.

Joseph Schumpeter Lecture; Paying Politicians: Theory and Evidence”,

Kill Bill: Buying the Legislative Agenda”, Working Paper.

Leaver,C.(2009),“Bureaucratic Minimal Squawk Behavior:Theory and Evidence from Regulatory Agencies”,

Mishra and T.Tressel (2009),“A Fistful of Dollars: Lobbying and the Financial Crisis”, IMF Working Paper no.

Morelli (2004),“Bad Politicians”,

Partisan Revolving Door”, Working Paper,

Political Careers or Career Politicians?”,

Revolving Door Lobbyists”, CEP Discussion Papers No 993, Centre for Economic Performance, London School of Economics and Political Science,

So Damn Much Money: The Triumph of Lobbying and the Corrosion of American Government”,

You Know versus What You Know:The Uses of Government Experience for Washington Lobbyists”,

The Power of K Street: New Research on the Economics of Lobbying

http://www.cesifo-group.de/portal/page/portal/DocBase_Content/ZS/ZS-CESifo_DICE_Report/zs-dice-2011/zs-dice-2011-1/dicereport111-forum2.pdf

The Power of K Street: New Research on the Economics of Lobbying

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics