The Economic Consequences of Political Donation Limits
By J
OHN
M
ALONEY
† and A
NDREW
P
ICKERING
‡
†University of Exeter ‡University of York
Final version received 25 September 2017.
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.
I
NTRODUCTION
This paper proposes that limits on political donations are mistaken when political
competition is sufficiently high. Besley et al. (2010) establish that political competition
has a strong beneficial role in terms of improving policy and generating better growth
outcomes in the context of the USA. In this paper we argue that this mechanism is
enhanced by political donations, provided that the degree of political competition is
sufficiently high. However, if political competition is low, then money acts corrosively,
thus political donations should be constrained.
At a basic level, the question of whether to limit political donations depends on the
motives of donors. In our model, donors are ideologically aligned and may benefit or be
harmed by rent-seeking by their own candidate. The conception of rent-seeking used in
this paper is general (and is defined more fully below) but necessarily implies some
overall wastefulness in policy. Importantly, donors also dislike, potentially to a greater
extent, rent-seeking by the opponent. Hence increased rent-seeking in office can have the
effect of both increasing donations to the candidate herself and increasing donations to
the opposition. When donations finance campaigns that positively affect electoral
outcomes, the response of opposition donors acts as a brake on rent-seeking.
The question of whether or not limits on political donations are to be preferred
therefore depends on the extent of political competition. Lower political competition
means relatively higher donations and core voters for the incumbent candidate, and a
reduced likelihood of the opposition winning. Incumbent politicians therefore discount
this outcome, and rent-seeking rises as the incumbent’s own rent-seeking incentives are
aligned with his support base. Limits on donations thus reduce rent-seeking at low levels
of political competition. On the other hand, high political competition means more
numerous opposition donors. Here both candidates face stronger incentives to reduce
rent-seeking, because of the impetus to reduce donations to the opposing candidate,
thereby enhancing their own electoral chances when donations finance effective electoral
campaigns. Here laissez-faire, by which we mean absence of limits on donations, is the
optimal policy.
© 2017 The London School of Economics and Political Science. Published by Blackwell Publishing, 9600 Garsington Road,
Oxford OX4 2DQ, UK and 350 Main St, Malden, MA 02148, USA
Economica (2018) 85, 479–517
doi:10.1111/ecca.12260
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