Emerging Trends in The Social and Behavioral Sciences

Money in Politics

Item

Title

Money in Politics

Author

Milyo, Jeffrey

Research Area

Social Institutions

Topic

Government Systems

Abstract

There is a disconnect between the popular understanding of the role of money in American politics and the lessons from social science research. The foundational research in this field finds that campaign spending has at best negligible impacts on election outcomes. Similarly, decades of research reveal very little evidence that campaign contributions or even lobbying has significant effects on the content of public policy. These findings are corroborated by cutting edge research on the effects of campaign finance reforms both at the federal level and in the states.

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Identifier

etrds0228

extracted text

Money in Politics
JEFFREY MILYO

Abstract
There is a disconnect between the popular understanding of the role of money in
American politics and the lessons from social science research. The foundational
research in this field finds that campaign spending has at best negligible impacts
on election outcomes. Similarly, decades of research reveal very little evidence that
campaign contributions or even lobbying has significant effects on the content of
public policy. These findings are corroborated by cutting edge research on the effects
of campaign finance reforms both at the federal level and in the states.

INTRODUCTION
The role of money in American politics has been an area of intense scholarly
investigation by both economists and political scientists. The most striking
aspect of this research is the extent to which it contradicts popular beliefs
(Sorauf, 1992). Among the general public and in the press, there is little
doubt that money is a dominant and deleterious force in politics. Indeed,
most readers likely share the popular concern that election outcomes are
largely determined by campaign spending and that the content of public
policy is strongly influenced by campaign contributions. Conventional
wisdom also holds that this state of affairs is responsible for declining trust
in government and increased alienation among voters. However, across
the board, the foundational social science literature does not support the
popular view of money in politics.
Social science research notwithstanding, there has been a tendency toward
more restrictive campaign finance regulations in federal and state elections,
although the pace of reform is no doubt frustrating for many advocates. The
most common regulations take the form of limits on the source and size of
contributions to candidates, although some jurisdictions also provide public funding for candidates. However, the Supreme Court has consistently
viewed such laws as restrictions on freedom of speech and association; thus
in the eyes of the Court, campaign finance regulations are permissible only
Emerging Trends in the Social and Behavioral Sciences. Edited by Robert Scott and Stephen Kosslyn.
© 2015 John Wiley & Sons, Inc. ISBN 978-1-118-90077-2.

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

to the extent that they prevent political corruption or the appearance of corruption. Recent and cutting edge research takes on the question of whether
reforms done indeed achieve this end. Given the findings of the more foundational science, it should be no surprise that there is little evidence that
campaign finance reforms have any impact on either political corruption or
public trust in the integrity of government.
FOUNDATIONAL RESEARCH IN POLITICAL ECONOMICS
SOCIAL CHOICE THEORY
Objections to the presumed influence of money in politics are based on the
belief that money distorts policy or election outcomes away from some desirable end to a less desirable end. However, this presupposes that democratic
processes in the absence of the distorting influence of money yield some
predictable outcome with desirable properties (e.g., justice, efficiency, or fairness). However, decades of social choice theory suggest otherwise.
Arrow (1963) shows that in general no collective choice process can satisfy
a minimal set of rationality conditions; put another way, there is no objective
way to aggregate individual preferences into a General Will for the group.
Majority rule is particularly troublesome. In general, unconstrained majority
rule outcomes are unpredictable and susceptible to extreme manipulation
by agenda-setters (McKelvey, 1976; Plott, 1967). Consequently, democratic
processes cannot be expected to produce policies that are rational or just,
nor does it make sense to ascribe any moral authority to the outcomes of
democratic processes. As if these results were not troubling enough, in large
representative democracies, citizens have little reason to cast informed votes
(Brennan & Lomasky, 1993).
Taken together, it is by no means apparent that the influence of money in
politics results in less desirable outcomes than may have occurred otherwise.
Rather, the question of how money influences politics (and to what end) is
an empirical one.
CAMPAIGN SPENDING
Most studies of the effectiveness of campaign spending analyze US House
elections; of these, Levitt (1994) is the seminal study. It is well known that
high-spending candidates often win elections; of course, popular candidates
also have the ability to raise and spend large sums of money. For this reason,
the correlation between campaign spending and electoral success overstates
the causal effect of campaign spending on election outcomes. In order to
identify the treatment effect of campaign spending on election outcomes, it is
necessary to control for the popularity and fundraising skills of candidates.

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Levitt (1994) accomplishes this by examining repeat meetings of the same two
candidates over time. This permits the estimation of the effects of changes in
campaign spending on changes in vote shares, controlling for time-invariant
attributes of candidates (such as popularity or fundraising acumen). Levitt
(1994) finds that the effect of candidate spending on vote shares in House
races is statistically indistinguishable from zero.
This surprising result has been corroborated by several subsequent studies. For example, Milyo (2001) examines a change in campaign finance law
that produces a large shock to incumbent spending but no change in incumbent vote shares. Gerber (1998) finds statistically significant but small effects
of candidate spending in US Senate elections. Nor do wealthy candidates or
those with large campaign war chests appear to enjoy any electoral advantage (Goodliffe, 2001; Milyo and Groseclose, 1999).
CAMPAIGN CONTRIBUTIONS
Again, most studies of the effects of campaign contributions on public policy examine contributions of members of the US House. It is well known
that incumbent legislators vote in a manner consistent with the preferences
of their campaign contributors; however, it is also well understood that this
correlation also overstates the causal impact of contributions on legislative
behavior. This is because legislators also vote in accordance with their constituents’ preferences, which are in turn highly correlated with the sources
of campaign contributions. Ansolabehere, de Figueiredo, and Snyder (2003)
review several prominent studies that examine the impact of special interest contributions on legislator’s roll call votes; overall, most studies find no
causal impact of contributions on votes of legislators after controlling for constituent preferences.
The findings reviewed by Ansolabehere et al. (2003) are corroborated by
the fact that corporate political expenditures (including lobbying) are in
an order of magnitude smaller than corporate philanthropic expenditures
(Milyo, Primo, & Groseclose, 2000). If campaign contributions really were
the functional equivalent of bribes, then one would expect corporations to
devote far more resources toward influencing political actors.
While Ansolabehere et al. (2003) argue that campaign contributions are best
viewed as consumption rather than investments, Hall and Wayman (1990)
suggest that contributions instead buy access to legislators and facilitate lobbying. However, corporate lobbying is highly correlated with contributions
from corporate political action committees, so the dearth of evidence that
contributions influence legislators also weighs against the notion that lobbying is highly influential (Ansolabehere, Snyder, & Tripathi, 2002; Milyo,
2002).

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

CUTTING EDGE RESEARCH
EVENT STUDIES
Financial markets provide a unique take on the importance of campaign contributions on the content of public policy. Event studies examine the movement of stock prices in order to discern whether and to what extent external
events impact the bottom-line of affected firms (Wells, 2004). For example, a
US Supreme Court decision upholding or striking a major campaign finance
regulation should provide new information to investors and cause a sharp
response in the share prices of firms that successfully exert political influence.
Ansolabehere, Snyder, and Ueda (2004) conduct just such an event study
around the Supreme Court’s review of the 2002 Bipartisan Campaign
Finance Reform Act (BCRA). Before 2002, corporations had the ability to
make unlimited contributions to political parties. These unlimited “soft
money” contributions were assumed by many to permit firms to effectively
buy political favors (e.g., tax breaks, subsidies, or federal contracts). If true,
investors should recognize this and bid up the shares of politically active
firms. BCRA ended the practice of corporate soft money contributions, but
the law was challenged in the courts. It was by no means apparent that
the Supreme Court would eventually uphold BCRA, but when it did so,
any uncertainty about the ability of firms to influence legislation via soft
money contributions was resolved. However, Ansolabehere et al. (2004)
show that share prices of politically active firms did not react negatively to
the announcement of the Supreme Court decision upholding BCRA.
In 2010, the Supreme Court struck down federal prohibitions on independent expenditures by corporations. Independent expenditures are not considered in-kind contributions to candidates under current law, provided they
are not coordinated with any candidate’s campaign. Again, many observers
assume that the ability of firms to make unlimited independent expenditures
confers a means to greatly influence public policy. If true, investors should
respond by bidding up the shares of corporations, especially those that are
heavily involved in federal contracting or are heavily taxed or regulated.
Werner (2010) examines this event and likewise finds no impact of the Court’s
decision on share prices of those corporations likely to be most affected.
EVALUATION STUDIES
There is a great deal of variation across states and over time in state campaign
finance regulations. This variation provides a natural experiment for identifying the effects of specific reforms on outcomes of interest. However, to
date only a few studies have taken advantage of this natural experiment. For
example, La Raj and Schafner (2012) examine the effects of changes in state

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campaign finance regulations in the states on partisan control of state government, incumbent reelection rates, and corporate taxes. Consistent with the
literature reviewed to this point, the authors find little effect of state reforms
on any of these outcomes.
As noted in the Section titled “Introduction,” the legal justification for regulations limiting political activity is that such laws prevent corruption or the
appearance of corruption. The study of Cordis and Milyo (2013) is the first
systematic test of whether state campaign finance reforms impact political
corruption convictions among public officials. Cordis and Milyo (2013) examine 25 years of data from all 50 states, but find no significant effect of contribution limits or public financing on corruption convictions. Milyo (2012)
conducts the first systematic test study of whether state campaign finance
laws influence citizen’s trust and confidence in state government. Once
again, Milyo (2012) finds no significant relationship between state contribution limits or public financing on trust and confidence in state government.
FIELD EXPERIMENTS
In recent years, political scientists have made great headway in conducting
true controlled field experiments on voter turnout (Green, McGrath, &
Aronow, 2013). Field experiments also hold great promise for identifying
treatment effects of campaign spending on political competition, although
to date much of the relevant research has been done on low salience local
elections. For example, Gerber (2004) analyzes the effects of partisan mailers
in several different types of political races. In general, mailers yield a
positive effect on turnout. However, in the one experiment involving a
general election for the US House, there were no significant effects of mailers
on voting or vote shares. These results are consistent with diminishing
marginal returns to campaign spending for higher offices and/or races with
more campaign spending.
KEY ISSUES FOR FUTURE RESEARCH
The extant literature tends to focus on campaign spending and contributions
in federal elections. More effort needs to be directed at understanding the role
of money in state and local elections. For example, recent field experiments
suggest that turnout is more responsive to ads in low salience local elections, so it stands to reason that campaign spending may well have important
effects in local elections. Further, federal office holders are subject to greater
scrutiny from the press and interest groups than state or local office holders.
Consequently, contributions to state and local office holders may be more
influential than otherwise suggested by existing studies of contributions to
federal legislators.

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EMERGING TRENDS IN THE SOCIAL AND BEHAVIORAL SCIENCES

The rapid rise of the so-called super PACs that make unlimited independent expenditures in federal elections has dramatically changed the political
landscape. While previous research would suggest that these independent
expenditures have only a modest treatment effect on election outcomes, these
activities nevertheless merit systematic study.
The apparent impotence of existing campaign reform efforts points to the
need for more entrepreneurial research in the service of informing future
reforms. For example, past reform efforts have focused on limiting campaign
spending and contributions, but there is little evidence that such efforts have
had any beneficial effects. Further, regulations aimed at limiting political
activity sometimes run afoul of judicial review. Instead, a new paradigm
for reform may be to subsidize small contributions by ordinary citizens.
This could be accomplished via a refundable tax credit. Such a reform
might energize casual voters and increase voter turnout. To this end, future
research should examine whether the mix of small and large contributions
or greater equality in the propensity to make political contributions has any
discernible impact on the appearance or actuality of political corruption.
Finally, the public debate over campaign finance reform has been
ill-informed. Scholars have an obligation to communicate research findings
to the public. A more realistic understanding of the role of money in
American politics may itself go a long way to improving public trust in
government and participation in politics.
ACKNOWLEDGMENT
I gratefully acknowledge financial support from the Edmond J. Safra Center
for Ethics at Harvard University.
REFERENCES
Ansolabehere, S., de Figueiredo, J., & Snyder, J. (2003). Why is there so little money
in U.S. politics? Journal of Economic Perspectives, 17(1), 105–130.
Ansolabehere, S., Snyder, J., & Tripathi, M. (2002). Are PAC contributions and lobbying linked? New evidence from the 1995 Lobby Disclosure Act. Business and
Politics, 4(2), 131–155.
Ansolabehere, S., Snyder, J., & Ueda, M. (2004). Did firms profit from soft money?
Election Law Journal, 5(2), 193–198.
Arrow, K. (1963). Social choice and individual values. New Haven, CT: Yale University
Press.
Brennan, G., & Lomasky, L. (1993). Democracy and decision. New York, NY: Cambridge University Press.
Cordis, A. & J. Milyo. (2013). Do state campaign finance reforms reduce public corruption?
Mercatus Center Working Paper 13–09 (p. 47). Retrieved from http://mercatus.
org/publication/do-state-campaign-finance-reforms-reduce-public-corruption.

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Gerber, A. (1998). Campaign spending and election outcomes: Re-estimating the
effects of campaign spending. American Political Science Review, 92(2), 401–411.
Gerber, A. (2004). Does campaign spending work? American Behavioral Scientist,
47(5), 541–574.
Goodliffe, J. (2001). The effect of war chests on challenger entry in US House elections. American Journal of Political Science, 45(4), 830–844.
Green, D. P., McGrath, M. C., & Aronow, P. M. (2013). Field experiments and the
study of voter turnout. Journal of Elections, Public Opinion and Parties, 23(1), 27–48.
Hall, R., & Wayman, F. (1990). Buying time: Moneyed interests and the mobilization of bias in congressional committees. American Political Science Review, 84(3),
797–820.
La Raja, R., & Schaffner, B. (2012). The (non-)effects of campaign finance spending bans
on macro political outcomes: Evidence from the states. Retrieved from http://people.
umass.edu/schaffne/laraja_schaffner_spendingbans.pdf.
Levitt, S. (1994). Using repeat challengers to estimate the effects of campaign spending on election outcomes in the U.S. House. Journal of Political Economy, 102, 777–98.
McKelvey, R. (1976). Intransitivities in multidimensional voting models. Journal of
Economic Theory, 12, 472–482.
Milyo, J. (2001). What do candidates maximize (and why should anyone care)? Public
Choice, 109(1–2), 119–39.
Milyo, J. (2002). Bribes and fruit baskets: What does the link between PAC contributions and lobbying mean? Business and Politics, 4(2), 157–159.
Milyo, J. (2012). Do state campaign finance reforms increase trust and confidence in
state government?. Retrieved from http://web.missouri.edu/∼milyoj/files/CFR
%20and%20trust%20in%20state%20government_v3.pdf.
Milyo, J., & Groseclose, T. (1999). The electoral effects of incumbent wealth. The Journal of Law and Economics, 42(2), 699–722.
Milyo, J., Primo, D., & Groseclose, T. (2000). Corporate PAC contributions in perspective. Business and Politics, 2(1), 75–88.
Plott, C. (1967). A notion of equilibrium and its possibility under majority rule. American Economic Review, 57, 787–806.
Sorauf, F. (1992). Inside campaign finance: Myths and realities. New Haven, CT: Yale
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Wells, W. (2004). A beginner’s guide to event studies. Journal of Insurance Regulation,
23(4), 61–70.
Werner, T. (2010). The Sound, the fury, and the nonevent: Business power and market
reactions to the Citizens United Decision. American Politics Research, 39(1), 118–141.

FURTHER READING
Coates, J. (2012). Corporate politics, governance, and value before and after Citizens
United. Journal of Legal Studies, 9(4), 657–696.
De Figueiredo, J., & Kelleher Richter, B. (2013). Advancing empirical research on lobbying. National Bureau of Economic Research Working Paper 19698 (p. 47). Retrieved
from http://www.nber.org/papers/w19698.

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Hall, R., & Deardorff, A. (2006). Lobbying as legislative subsidy. American Political
Science Review, 100(1), 69–84.
Milyo, J. (1999). The political economics of campaign finance. The Independent Review,
3(4), 537–548.
Milyo, J. (2013). Campaign spending and electoral competition: Towards more policy
relevant research. The Forum, 11(3), 437–454.
Milyo, J. (2014). Corporate influence and political corruption: Lessons from stock
market reactions to political events. Independent Review, 19(1), 1–18.
Primo, D., & Milyo, J. (2006). Campaign Finance Laws and Political Efficacy: Evidence from the States. Election Law Journal, 5(1), 23–39.
Riker, W. (1982). Liberalism against populism: A confrontation between the theory of democracy and the theory of social choice. San Francisco, CA: W.H. Freeman and Company.
Shepsle, K., & Bonchek, M. (1997). Analyzing politics: Rationality, behavior, and institutions. New York, NY: W. W. Norton Inc.

JEFFREY MILYO SHORT BIOGRAPHY
Jeffrey Milyo is a professor of economics at the University of Missouri in
Columbia, MO. He is also a Senior Fellow at the Cato Institute in Washington, D.C. and a nonresidential fellow at the Safra Center for Ethics at Harvard
University. Milyo was previously on the faculty at Tufts University in Medford, MA and the Irving B. Harris School at the University of Chicago; he has
also been a visiting scholar at MIT, Stanford University, and Yale University.
Milyo’s research has been published in leading journals in multiple disciplines, including the American Economic Review, the American Journal of Public
Health, Election Law Journal, the Journal of Law and Economics, Journal of Politics, and the Quarterly Journal of Economics. His recent work examines social
determinants of health, determinants of political corruption, the efficacy of
campaign finance reforms, and state voter identification laws.
University of Missouri faculty webpage: http://web.missouri.
edu/∼milyoj/
Curriculum vitae: http://web.missouri.edu/∼milyoj/files/MilyoCV.pdf.
Cato Institute: http://www.cato.org/
Safra Center for Ethics: http://www.ethics.harvard.edu/
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Money in Politics

9

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