Many resources are allocated not by markets, but by the political process. Federal spending in 2012 amounted to almost 23% of GDP, according to the Congressional Budget Office. But that number probably underestimates the true size and scope of government, as it doesn’t include a measure of tax expenditures (which basically amount to spending through the tax code) or regulations.
It shouldn’t be surprising, then, that individuals and firms have a strong incentive to engage in rent seeking. That is, they use political means — like lobbying – to obtain favorable regulations, tax breaks, subsidies, or other government benefits. While rent seeking benefits the rent seeker, it is wasteful from society’s perspective because it uses valuable resources without creating any new wealth.
Observers across the political spectrum have expressed concern about the power of lobbyists. This concern often focuses on the “revolving door” phenomenon, whereby former government employees can become lobbyists and leverage their political connections to obtain favorable outcomes for their clients.
Exactly how valuable are these political connections? A study recently published in the American Economic Review – by Jordi Blanes i Vidal of the London School of Economics, Mirko Draca of the University of Warwick, and Christian Fons-Rosen of Universitat Pompeu Fabra – suggests that lobbyists’ clients are willing to pay quite a bit for them.
The authors focus on lobbyists who used to be congressional staffers. In particular, they look at the revenue generated by these lobbyists before and after the senators or representatives for whom they once worked leave office. They find that, on average, when a senator leaves office, lobbyists who used to work for that senator experience a 24% drop in the lobbying revenue that they generate. In monetary terms, the median drop in annual revenue is about $182,000 per revolving door lobbyist. This effect is more pronounced for lobbyists with connections to senators who serve on the Finance and Appropriations committees. The authors find a similar effect for lobbyists with connections to representatives who serve on the Ways and Means committee.
Rent seeking is a widespread phenomenon that wastes resources. This research provides valuable insight into how that process works by quantifying the importance of personal political connections in lobbying.