The Political Roots of Intermediated Lobbying:

Evidence from Russian Firms and Business Associations

Andrei Govorun Higher School of

Economics

October 10, 2013

Israel MarquesColumbia University,

ICSID - HSE

William Pyle Middlebury College

How Does Political Competition Shape Lobbying Strategies?

– Focus on collective versus individual strategies– Business association channel is more common

where there is more (less) political competition (concentration)

– Officials consult encompassing associations more where there is more (less) political competition (concentration)

– Suggests supply-side explanation – politicians’ incentives shape strategy

Why Study Strategy?

• Normatively: Social welfare effects of lobbying are ambiguous:– sub-optimal political auctions (Grossman and Helpman 1994) or

mitigation of informational asymmetries (Downs 1957)?– Encompassing channels, more likely to align outcomes with social

welfare (Olson 1982)– Channels used may influence outcomes

• Empirically: Recent focus on workings of autocratic legislatures– Rent allocation (Boix and Svolik 2013) vs. opposition bargaining

(Gandhi 2008)– Accountability to Constituents (Malesky and Schuler 2010)– But do lobbying strategies differ?

Firms’ Strategic Calculus

• Firms maximize: Pr(Success)*Benefits – Costs

• Individual strategy (make) - Direct contact– Firm assumes all costs– No coordination Problems– No outside veto

• Collective strategy (buy) - Business associations– Firms share costs– Coordination required among members– Members can veto others’ proposals

Institutions and Lobbying

• Cost-benefit story (Demand Side)– Costs of lobbying increase as politicians to be lobbied increase

(Tsebelis 1995, 2002)– The more diffuse the political system, the more expensive

lobbying

• Accountability story (Supply Side)– Politicians facing elections have incentives to provide public

goods/encompassing benefits (Bueno de Muesquita et al. 2003)

– Business associations plausibly screen for externality generating particularistic benefits

– Politicians more likely to heed these encompassing interests

Hypotheses

• Both stories are about the interaction of cost-benefit calculations and institutions– H1: As regions become more (less) politically

competitive (concentrated), firms prefer to lobby through business associations.

• But which actor is decisive is different in each story. Which mechanism applies?– H2: If the accountability story is true, the authorities

should prefer encompassing BAs in politically competitive regions.

Data: Firm Survey• Survey of Russian firms (2010):

– 1013 firms

– 6 industrial sub-sectors and 4 non-industrial sectors

– 169 Lobbied at the Regional Level

• 61 regions - Regional indicators of democracy :

– Moscow Carnegie Center Democracy Index

– Effective Number of Parties (Region)

– Press Freedom Index (Glasnost)

– Margin of Victory (Duma and Region)

Channels of lobbying

DV: If your firm attempts to influence the passage of new laws or normative acts at the regional level that are important to your business, in what way do you attempt to do this?

Association

Governor

Reg. legislatures

Media

Influential Individuals

55%

36%

31%

21%

17%

Model 1: Firm SurveyPr(BA_Lobbyi)= β*Democracyj + Firm level controlsi+

+ Regional controlsj + εi

Firm-level controls:

Firm size

Export dummy

Sector dummies

Settlement status

Holding Co. dummy

Regional controls:

Region size (population)

GRP per capita

Full sample and subsample of lobbying firms

Ownership

BA Membership

Non-BA lobbying

Productivity indicators

Multi-level modeling estimation (Varying Intercepts)

Firm Level Predictors of Use of Business Associations

• Hold for both lobbyers and non-lobbyers (except Alternative Strategy dummy)

• Other variables are Insignificant Predictors

Firm Characteristic Sign Significance

Exporter + ***

Member of a Regional Association

+ ***

Alternative Lobbying Strategy

+ ***

Lobbying Through Business Associations

Lobbying through BAs  (1) (2) (3) (4) (5)Carnegie Index 2009 0.04

[0.03]

Effective number of parties 0.19**[0.10]

Press freedom 2009 0.43*[0.27]

Margin UR in State Duma -4.31**[1.93]

Margin UR in Reg. parliaments -2.36**[0.98]

Firm level controls Yes Yes Yes Yes YesRegional controls Yes Yes Yes Yes YesObservations 936 936 936 936 936

Lobbying through Business Associations (Lobbyers)

Lobbying through BAs  (1) (2) (3) (4) (5)Carnegie Index 2009 0.07*

[0.04]

Effective number of parties 0.21* [0.12]

Press freedom 2009 0.55[0.34]

Margin UR in State Duma -5.23**[2.37]

Margin UR in Reg. parliaments -3.10**[1.26]

Firm level controls Yes Yes Yes Yes YesRegional controls Yes Yes Yes Yes YesObservations 162 162 162 162 162

Association survey• Survey of Russian associations (2010):

– 313 associations (235 of which are regional)

– 46 Regions

• DV: “Do you agree that state officials at regional level are interested in

associations’ participation in discussion and development of laws and

regulations?“

– Yes (53.6%)– No (46.4%)

Association survey

No response

<10%

10-25%

25-50%

>50%

27%

33%13%

12%

15%

Independent variables: Encompassingness

1) BA members' contribution to Regional GRP

2) Sectoral Composition: 88 sector specific and 145 multi-

sector associations

Model 2

Pr(officials_interestedi) = β*Democracyj + γ Demj*Encompassingnessi

+ Association level controlsi+ Regional controls + εi

Association level controls:

Association size

Funded by members’

donations

Branch of national BA

Regional controls:

Regional population

GRP per capita

Multi-level modeling estimation (Varying Intercepts and Slopes)

Officials’ Interest – GRP Concentration  (1) (2) (3) (4) (5)Carnegie Index 2009 -0.02

[0.07]Carnegie Index 2009*Low Concentration -0.05 [0.07]Effective number of parties 0.04

[0.19]Effective number of parties*Low Concentration -0.38* [0.21]Press freedom 2009 0.93

[0.64]Press freedom 2009*Low Concentration -1.29* [0.66]Margin UR in State Duma -2.02 [3.13]Margin UR in State Duma*Low Concentration 7.04** [3.64]Margin UR in Reg. parliaments 1.01

[1.68]Margin UR in Reg. parliaments*Low Concentration 5.17*** [2.01]

Association level and regional controls Yes Yes Yes Yes YesObservations 222 222 222 222 222

Officials’ Interest - Sectoral Composition   (1) (2) (3) (4) (5)Carnegie Index 2009 -0.0`

[0.03]Carnegie Index 2009*Single Sector -0.11** [0.05]Effective number of parties -0.26*

[0.13]Effective number of parties*Single Sector -0.02 [0.17]Press freedom 2009 0.28

[0.33]Press freedom 2009*Single Sector -0.99** [0.48]Margin UR in State Duma 3.67*

[2.01]Margin UR in State Duma*Single Sector -0.95 [3.00]Margin UR in Reg. parliaments 3.73***

[1.21]Margin UR in Reg. parliaments*Single Sector 1.26 [1.67]

Association level and regional controls Yes Yes Yes Yes YesObservations 222 222 222 222 222

Robustness Checks

• Modeling strategy

– Multi-level models and traditional probit with cluster corrected standard errors

• Selection Effects

– Institutional quality does not predict decision to lobby

– Institutional quality does not predict Business Association membership

• Additional Specifications

– Firms: Manager characteristics, relationship to local officials, main markets,

region’s share of profit tax in total revenue, and size of regional bureaucracy

– BAs: BA members’ share of regional employment (alternative measure of

encompassingness), region’s share of profit tax in total revenue, and size of

regional bureaucracy

Conclusions

• Firm survey suggests strategies are conditioned by political institutions:– As Democracy measure ↑, the probability of using

Business Associations ↑ (and vice-versa)

• Association survey suggests this has to do with politicians’ incentives:– Encompassing Business associations are

more likely to be consulted in more democratic regions

Implications• Implications

– Business state relations are potentially reinforced by lobbying strategy

– If business associations represent encompassing interests, these

interest are more likely to become policy in more competitive regions

– Business Associations serve different purposes in different institutional

settings

• Future Research

– How do strategies condition perceptions of lobbying success across

different regimes?

– How do the functions business associations serve vary with

institutional setting?

Thank you for your attention. Questions?