Easing Restrictions to Corporate Influence: Regulatory Capture and the Electric Utility Industry

Abstract

Can firms influence their regulatory environments by making campaign contributions? To answer this question, I exploit a natural experiment in which the repeal of a federal law exogenously lifted restrictions to corporate political influence across U.S. states. Specifically, I study the 2005 repeal of the the Public Utility Holding Company Act of 1935, which legalized electric utility campaign contributions in 30 states as a consequence of existing state campaign finance law. Using a difference-in-differences identification strategy, I find that state public utility commissions authorized significantly higher electric utility returns on equity in treated states compared to control states. This increase coincided with a large and significant increase in utility campaign contributions in treated states, supporting the contention that firms can influence their regulatory outcomes through political strategy. Further, consistent with theoretical expectations that firms lobby politicians with marginally hostile preferences, I find that utilities strategically targeted contributions to the Democratic party, who authorized higher returns than Republicans in treated states. This article contributes to the broad literature on the influence of money in politics by estimating the plausibly causal effect of campaign contributions on regulatory outcomes.