Firm heterogeneity and lobby participation

The structure of protection across sectors has been interpreted as the result of competition among lobbies to influence politicians, but lobbies have been treated as unitary decision makers and little attention has been devoted to the importance of individual firms in this process. This paper builds a model where individual firms determine the amount of resources to allocate to political contributions and shows that, in the presence of a fixed cost of channeling political contributions, it is efficient for a lobby to be formed by the largest firms in a sector. Therefore the size distribution of firms plays an important role: sectors with a higher share of firms above a given size exhibit higher intensity of political activity. This prediction is borne out by the data: industries characterized by higher firm size dispersion obtain a higher level of protection. The model is also tested against the leading ‘Protection for Sale’ paradigm, employing a newly matched data set on firm-level political contributions. The empirical evidence shows that, accounting for individual firm behavior, the model explains a larger fraction of the variation of protection across sectors.