Channeling Influence: How Companies Use Campaign Contributions To Compete

After the 1996 telecom deregulation, American cable, broadband, and phone companies became highly strategic in their campaign finance strategy, using donations to state legislators to gain advantage with appointed regulators.

And when their competitors started opening their wallets, companies and PACs became even more generous, according to new research.

The Market for Legislative Influence Over Regulatory Policy,” forthcoming in Advances in Strategic Management, illustrates how telecommunications companies—from established providers such as Ma Bell to the newer players who gained entry to local markets—have used campaign donations to create their own channel of influence.

“Firms are clearly trying to manage their regulatory environment, and even if they don’t want to donate, they have to respond when their competitors try to manage their environment,” says Rui J.P. de Figueiredo, an associate professor in the Haas Business and Public Policy Group and the paper’s lead author. De Figueiredo studies the intersection of organizations and public policy.

Incumbents wanted to maintain their advantage by keeping prices for access to telephone networks high, while newer entrants wanted prices low so they could compete. “Firms may not always agree on what they want from regulators, but they are essentially required to try to influence policy in states where regulation is up for grabs,” says de Figueiredo.

The paper is co-authored by Geoff Edwards, PhD 04, an economist who currently serves as vice-president at Charles River Associates and is one of the first to test campaign contribution strategies by rival interests at the state level.

The study also found that regulators who are political appointees are generally more responsive to the companies than those who are elected by voters. The firms donate more, and expect their contributions to have a bigger effect, when regulators are beholden to the legislature for their position.

The study’s findings are based on data collected from FollowTheMoney.org, a nationwide, non-partisan archive of political contributions and their sources. The study also factored in the characteristics of the donating firms (size, location, and whether they operate in more than one state); the political environment (who controlled the legislature and whether regulators were elected or appointed); and the state’s demographics (how many jobs the companies provide, how much the other employers in the state rely on and utilize the telecommunications industry). Then the researchers analyzed and calculated how contributions have influenced policy and also how competing firms have responded to each other’s donations.

The results also imply, says de Figueiredo, that engaging in “non-market” strategies with government agencies, interest groups, or the media, in addition to market strategies that focus on customers, suppliers, and direct competitors, is an important way for firms to gain advantage.

While this paper focuses on the behavior of firms, an earlier study by Prof. de Figueiredo found that regulators are indeed influenced by political donations when crafting policies. “In that study, the firms that gave the most gained fairly significant market advantages in terms of the regulated prices which are paid to incumbents for access to their local phone loops by entrants,” says de Figueiredo.

After the 1996 telecom deregulation, American cable, broadband, and phone companies became highly strategic in their campaign finance strategy, using donations to state legislators to gain advantage with appointed regulators.

And when their competitors started opening their wallets, companies and PACs became even more generous, according to new research by Assoc. Prof. Rui J.P. de Figueiredo.

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