The Economic Consequences of Political Donation Limits

Abstract

The economic consequences of limits on political donations depend on the degree of political competition. Donors, who are ideologically aligned with candidates, decide how much to contribute to their own candidate. They may benefit from rent‐seeking by their own candidate but dislike rent‐seeking by the opposition. Increased rent‐seeking by politicians thus generates campaign contributions for themselves but also mobilizes donations to the opposing candidate, potentially to a greater extent. This latter effect acts as a deterrent to rent‐seeking when contributions finance electoral campaigns and positively affect election chances. When political competition is low, incumbent donors outnumber opposition donors, and limits reduce rent‐seeking. When political competition is high, donors are equalized and laissez‐faire reduces rent‐seeking. Consistent with these hypotheses, data from the USA suggest that limits are associated with better policies and stronger growth performance at low levels of political competition, while laissez‐faire is preferred when political competition is high.