Catherine Hafer

Flexing Muscle: Corporate Political Expenditures as Signals to the Bureaucracy

Regulatory agencies impose costs and benefits tailored to individual firms through their discretionary enforcement activities. We propose that corporations use political expenditures in part to “flex their muscles” to regulators and convey their willingness to fight an agencys specific determinations in the political arena. Because the signaling function of political expenditures is strategically complex, we derive a formal model wherein we demonstrate the existence of an equilibrium in which (1) large political donors are less compliant than smaller ones, but the bureaucracy monitors them less, and (2) firms with publicly observable problems reduce their political expenditures. We test the empirical implications of the model using plant-level data from the Nuclear Regulatory Commission on the inspection of 63 privately operated nuclear power plants and the political expenditures of their parent companies. We find strong evidence for the first prediction and qualified support for the second.

Consumption or Investment? On Motivations for Political Giving

We propose a strategy to distinguish investment and consumption motives for political contributions by examining the behavior of individual corporate executives. If executives expect contributions to yield policies beneficial to company interests, those whose compensation varies directly with corporate earnings should contribute more than those whose compensation comes largely from salary alone. We find a robust relationship between giving and the sensitivity of pay to company performance and show that the intensity of this relationship varies across groups of executives in ways that are consistent with instrumental giving but not with alternative, taste-based, accounts. Together with earlier findings, our results suggest that contributions are often best understood as purchases of “good will” whose returns, while positive in expectation, are contingent and rare.

Cognition and Strategy: A Deliberation Experiment

A theory of deliberation must provide a plausible account both of individuals’ choices to speak or to listen and of how they reinterpret their own views in the aftermath of deliberation. We describe a game-theoretic laboratory experiment in which subjects with diverse interests speak or listen before voting over a common outcome. An important feature of our strategic setting is that introspective agents may, upon hearing an unpersuasive argument, update away from the speakers preferred position. While subjects are responsive to strategic incentives, they also deviate from Bayesian predictions by “overspeaking” when speech is likelier to alienate than persuade. Subjects thus come closer to the deliberative democratic ideal of a free exchange of arguments than equilibrium predictions suggest. We interpret evidence from subjects’ deliberative choices and policy votes in terms of a cognitive hierarchy among subjects, defined by differing abilities to grasp the strategic implications of different kinds of information.

Corporate Influence and the Regulatory Mandate

Industries face collective action and commitment problems when attempting to influence Congress. At the same time, an individual firms political investments can yield reduced bureaucratic scrutiny by indicating that firms willingness to contest agency decisions. We develop a model in which the desirability of maintaining a political footprint for this reason enables individual firms to commit to rewarding elected officials who maintain laws benefiting an entire industry. Our “dual forbearance” model anticipates that corporate political investments will be larger on average when statutes are stringent and that even pro-industry legislative coalitions will benefit politically from the existence of a minimal regulatory state.

Public Protection or Private Extortion

We analyze the strategic interaction between a firm, an extortionary mafia, and a potentially corrupt government. The model identifies several results. First, government spending is not monotonic in revenues. Second, although the firm wants the government to challenge the mafia (it uses the threat of electoral sanctions to induce the government to do so), in equilibrium, the firm does not directly appeal to the government for protection even though it is extorted. The more likely the government is to uncover mafia extortion independent of an appeal from the firm, the more effective the firms threat of electoral sanction is at motivating the government to invest in law enforcement. This is because the electoral threat to punish failure on the governments part is only a compelling reason to invest in law enforcement when the government actually expects to confront the mafia. This same logic also implies that the relationship between mafia strength and government corruption is somewhat counterintuitive. When the mafia is strong in equilibrium (i.e. pervasive and extorting large fees), the government is not very corrupt. When the mafia is weak, the government is highly corrupt. Finally, an extension shows that if the mafia and government can collude, then the harsher the threatened sanctions against the mafia, the less likely the government is to challenge the mafia because the mafia is more willing to bribe the government.