Business Lobbying Boosts Executive Pay, not Company Profitability

Business Lobbying Boosts Executive Pay, not Company Profitability
July 10, 2014

Many people believe a modern business's success or failure depends partly on its ability to lobby or secure favor from political connections. This belief has only grown since the federal government responded to the financial crisis by increasing the subsidies, grants, and contracts given directly to specific businesses. Some businesses have benefited; others have failed in spite of these taxpayer-funded favors.

So is “rent-seeking,” as the process is known, actually profitable for businesses? Is it worth time and money that could be put to other uses?

In a new Mercatus Center at George Mason University study, economists Russell Sobel and Rachel Graefe-Anderson find that political activity has no significant effect on the performance of most firms and industries. However, individual company executives do appear to profit from having close ties to the political process.

More Lobbying Benefiting Execs

Using data that includes recent stimulus funding, the authors find:

  • Total expenditures on lobbying the federal government rose by almost 25 percent from 2007 to 2010, to more than $3.5 billion. There are more than 12,000 federal lobbyists pushing their interests in Washington. However, there is little evidence that companies’ lobbying expenditures or political contributions lead to greater profits.
 
  • Company executives appear to be the main beneficiaries of strong political connections between firms and the federal government, capturing dollars which do not flow to the rest of the firm or its shareholders.
 
  • There is one notable exception: the banking and finance industries. Influenced by the $450 billion TARP program, these sectors show a link between lobbying efforts and both corporate executive compensation and firm profitability.
 
  • Companies that accepted TARP funds did so with limitations on executive compensation; the fact that the program’s designers saw fit to insert this provision may be more understandable considering the paper’s findings.
 
  • Despite its high level of media attention, crony capitalism does not seem to have a widespread resource-allocation impact on the economy. Still, the authors’ findings are consistent with highly publicized examples of politically favored firms like Solyndra, which go bankrupt despite receiving government assistance. There is a clear incentive for executives to direct resources to seek government funds even when it may not strengthen the company.

In short, government-granted privilege does not increase prosperity for the vast majority of American workers and investors. Additionally, another recent Mercatus study details how these policies fail state and city governments that offer benefits to attract jobs and economic activity.

Kyle Precourt (kprecourt@mercatus.gmu.edu) is state and local media coordinator for the Mercatus Center at George Mason University.

Internet Info

“The Relationship Between Political Connections and the Financial Performance of Industries and Firms,” Russell S. Sobel and Rachel L. Graefe-Anderson, Mercatus Center: http://heartland.org/policy-documents/relationship-between-political-connections-and-financial-performance-industries-and

“The Political Economy of State-Provided Targeted Benefits,” Christopher J. Coyne and Lotta Moberg,” Mercatus Center: http://heartland.org/policy-documents/political-economy-state-provided-targeted-benefits