Friday, 26 March 2010: 14:30
This paper estimates the impact that campaign contributions from the financial sector had in influencing U.S. legislators to support the financial sector bailout bill (TARP) passed by the United States Congress in October 2008. After expanding on a classic theory of moral hazard and electoral accountability, I use a probit analysis to estimate the probability that a legislator supported the bailout bill. The primary explanatory variables of interest, which are motivated by the theoretical section, are campaign contributions to legislators from special interest groups and a measure of constituency characteristics. Controlling for heterogeneity of districts follows from the paper's theoretical advancement, which is to allow for heterogeneous electoral constraints on the legislators' ability to collect rents from and vote with the financial special interest. The heterogeneity is based on the importance of the financial sector for employment in districts.
The data was taken from three main sources. Primary to the analysis and the real starting point for this work, was the website of the Center for Responsive Politics: www.opensecrets.org. Data for lobbying receipts were found there, from the financial sector specifically, and the total lobby receipts by legislator. Secondly, data for the importance of the financial sector to a state's employment was taken from the Bureau of Labor Statistics. This is the percentage of the state's non-agricultural employees that are employed in financial activities in 2008. Finally, data for the financial bailout voting record and a measure of legislator government-market ideology is taken from www.voteview.com/dwnomin.htm.
The theoretical section has several empirical predictions as to the likelihood that a legislator supports the bailout. The probability that a legislator voted yes to the TARP bill is: (i) increasing in the campaign contributions from the financial sector, and (ii) decreasing in the campaign contributions from outside the financial, and (iii) increasing in the importance of the financial sector for employment among the legislator's constituents. All three predictions are supported by the probit analysis of the Senators, whereas only the first two predictions are supported by the probit analysis of Representatives from the House.
The probit estimation results are nothing new to Public Choice adherents. Influence over Senators can be bought and this was true of the financial bailout of 2008: all else equal, an additional $100,000 in campaign contributions from the commercial banking interest is found to increase the probability that a Senator supported the bailout by 15.9%. In the House of Representatives, the effect of campaign contributions was also significantly positive, where an additional $10,000 in campaign contributions from commercial banks increases the probability a Representative supported the bill by 4.4%.
The data was taken from three main sources. Primary to the analysis and the real starting point for this work, was the website of the Center for Responsive Politics: www.opensecrets.org. Data for lobbying receipts were found there, from the financial sector specifically, and the total lobby receipts by legislator. Secondly, data for the importance of the financial sector to a state's employment was taken from the Bureau of Labor Statistics. This is the percentage of the state's non-agricultural employees that are employed in financial activities in 2008. Finally, data for the financial bailout voting record and a measure of legislator government-market ideology is taken from www.voteview.com/dwnomin.htm.
The theoretical section has several empirical predictions as to the likelihood that a legislator supports the bailout. The probability that a legislator voted yes to the TARP bill is: (i) increasing in the campaign contributions from the financial sector, and (ii) decreasing in the campaign contributions from outside the financial, and (iii) increasing in the importance of the financial sector for employment among the legislator's constituents. All three predictions are supported by the probit analysis of the Senators, whereas only the first two predictions are supported by the probit analysis of Representatives from the House.
The probit estimation results are nothing new to Public Choice adherents. Influence over Senators can be bought and this was true of the financial bailout of 2008: all else equal, an additional $100,000 in campaign contributions from the commercial banking interest is found to increase the probability that a Senator supported the bailout by 15.9%. In the House of Representatives, the effect of campaign contributions was also significantly positive, where an additional $10,000 in campaign contributions from commercial banks increases the probability a Representative supported the bill by 4.4%.