Relational Influence Buying

Abstract: Existing empirical evidence that finds very high actual or potential return to some campaign contributions and wonders, if contributions buy influence, why more exchange does not occur. Other empirical work has found consistent long-term relationships of contributions from interest groups to politicians. Yet, models of influence buying have treated the exchange as a simple spot transaction. This paper develops a formal model of relational influence buying between a firm and a politician where campaign contributions are exchanged for policy favors in a self-enforcing contract. This contract provides several insights. First, not all favors that have positive joint surplus to the firm and politician are contractible. Second, the model predicts that horizons of politicians will reduce the ability to raise funds. Third, the model provides empirical predictions for when firms should lobby themselves or outsource and on the structure of legislation. The first can explain why more, apparently valuable, trade does not occur. I find evidence consistent with the horizon effects from US Congress people's age and term limits in US state legislatures. The third insight speaks both to potential regulatory implications and implications for managers’ influence activities. Finally, the insights from the model suggest empirical tools to detect influence buying without directly observing the favors.