Caring but Sharing Unintentionally: Lobbying for Innovations and the Leakage of Knowledge

Abstract

When firms engage in lobbying, their intended outcome is a regulatory change that benefits them. However, prior literature suggests that there may also be an unintended outcome of lobbying---the leakage of knowledge to competitors. In this paper, I explore when the intended and the unintended outcomes are more likely by theorizing about the relationship between lobbying and innovation. I predict that innovations that are novel are more likely to benefit from the intended regulatory changes. However, innovations that use knowledge uniquely possessed by a few firms are more likely to be compromised by the leakage of knowledge that happens during lobbying. I use new data from 1999-2013 on public U.S. firms that engaged in lobbying to federal agencies, the regulatory changes made by federal agencies, and the 16,000 patents applied for by those firms. I employ unsupervised machine learning (Doc2Vec) to measure knowledge leakage and an instrumental variable 2SLS mediation analyses to test the theory. The results suggest that the intended regulatory changes that follow lobbying can benefit innovations by facilitating wider adoption. However, unique technological knowledge that only a few firms possess may be expropriated by competitors during the process of lobbying. Overall, this paper demonstrates that fundamental aspects of innovation---such as institutional change, knowledge transfer, and technology adoption---are closely related to lobbying, a form of nonmarket activity.