Polluters and Collective Action: Theory and Evidence

Abstract

1. IntroductionThe seminal theory by Olson (1965) predicts that industries with fewer firms have a greater ability to undertake collective action. They organize cooperative political action more easily because greater concentration lowers the cost of political action.1 The empirical evidence is inconclusive, however. Andres (1985), Masters and Keim (1985), Heywood (1988), and Humphries (1991) find positive effects of industry concentration on the probability of making political action committee (PAC) contributions (see also McKeown 1994). Pittman (1976) finds that concentrated industries generate greater contribution levels. Grier, Munger, and Roberts (1991) find an inverted U-shaped relationship between the level of PAC formation and industry concentration, with a maximum political participation rate occurring at a four-firm concentration ratio around 0.45. Esty and Caves (1983) and Zardkoohi (1985) report ambiguous effects of concentration on PAC contributions.2In this paper we suggest an alternative perspective on firms' ability to organize collective action which, to our knowledge, has been ignored so far. The novel argument is that industries that face multiple regulations (a greater number of policy issues) find it easier to overcome collective action problems and sustain lobbying. In particular, we focus on the difference between firms in polluting and clean industry sectors. Using a simple repeated game framework similar to Spagnolo (2000), we argue that firms in industries that are naturally polluting (because of their input requirements), and therefore incur pollution abatement costs, will face an additional policy battle compared with other industries, everything else equal.3 This enables such industries to sustain greater cooperation and lobbying. This is because firms seeking to form a lobby group face a free-riding problem due to a limited amount of "enforcement power" available to punish deviation and ensure cooperation. Firms that face multiple areas of regulation have an advantage in the formation of lobby groups because they have a greater amount of enforcement power available to reallocate between policy issues. When joint lobbying gives large gains in environmental policy, this surplus can be reallocated to trade policy, for example. Free-riding behavior on trade policy lobbying may more easily be disciplined. The prediction that emerges from our theoretical model is that polluting industries are relatively less affected by the free-riding problems involved in organizing political action, and we thus expect the level of political contributions to be higher in these sectors.4We evaluate this prediction using a cross-section data set of U.S. manufacturing industries. Our empirical model builds on a multiple-equation model by Gawande and Bandyopadhyay (2000), who test the well-established theory of Grossman and Helpman (1994) on the pattern of protection (their theory takes lobby group formation as given). We augment Gawande and Bandyopadhyay's model with an additional equation for environmental policy stringency.5 The empirical results lend support to our theory. Industry PAC contributions, and thus the level of lobby group cooperation, are greater in industries with larger pollution abatement costs. This result is robust to several measures of lobby group formation and environmental policy.The present paper contributes to the recent literature on the formation of lobby groups. In the area of pollution taxation, Damania and Fredriksson (2000) argue that collusive industries may more easily form lobby groups that oppose such taxes. Using a related setup, Damania and Fredriksson (2003) discuss the effect of (exogenous) trade liberalization on environmental policy formation when lobby group formation is endogenous. Pecorino (1998) and Mitra (1999) discuss the formation of trade lobby groups.6 Neither of these papers explore the relationship between collective action and the number of policy instruments, however. …