The Politics of Government Investment

Abstract

This paper investigates whether corporate political influence affects government investment decisions. We study the efficacy of the various forms of political influence, ranging from the relatively passive connections between firms and politicians, such as those based on politicians’ voting districts to the more active forms of influence, such as lobbying, campaign contributions, and connections to regulators via directorships. Using hand-collected data on firm applications for government investment funds in the United States, we find that firms with political connections are significantly more likely to be funded, controlling for other firm characteristics. Investments in politically-connected firms underperform those in unconnected firms. Overall, we demonstrate one mechanism through which political influence affects investment and show that connections between firms and regulators appear to distort rather than improve investment efficiency.