Firm Political Strategy - IOEA

Firm Political Strategy - IOEA

Firm Political Strategy Rick Vanden Bergh University of Vermont IOEA 2016, Corsica, France. Firm Political Strategy (shameless plug) Strategy in Political Markets Nonmarket Strategy Strategy Beyond Markets Past Presidents of SIOE Founding Fathers & Important Influences

Lecture Outline Political Strategy Broad Themes Motivating example Political Markets Framework Literature -- Theory & Empirics -- IOE perspective Assumptions Suppliers of Policy a little theory Demanders of Policy brief discussion of new project Design & Implementation

Limitations and Opportunities Market vs Nonmarket arena Market Environment Interactions among a focal firm and entities such as suppliers, consumers, shareholders, employees, and competitor firms. Nonmarket Environment interactions among a focal firm and entities such as community organizations, NGOs, activist groups, and government policy makers Strategy

Concerted actions by the focal firm to create and capture long run economic value Market Strategy Examples IOE related Williamson, 1991; Oxley, 1997; Nickerson & Silverman, 2003 Two Broad Themes in Political Strategy Private Politics concerned with the interactions between firms and special interest groups like activist environmental groups or international NGOs Activist groups often launch campaigns to get firms to change practices and selfregulate & to avoid Public Politics Baron & Diermeier, 2007; King, 2008;Lenox & Eesley, 2009

Tools include media campaigns (Baron, 3005; Bonardi & Keim, 2005) and boycotts (Friedman, 1986) Limited incorporation of institutional environment at the country level (Breitinger & Bonardi 2016) Public Politics concerned with the interactions between firms and government officials that have the authority to pass new legislation, promulgate regulatory rules or issue statutory interpretations (AiSM Strategy Beyond Markets 2016, introduction)

World Bank survey (2014) & PwC Survey (2015) CEOs ranked Public Politics ahead of Market Strategy when considering investments and threats to returns Motivating Example Exelon & PSEG announce merger and acquisition PSEG has operating utilities in New Jersey & Pennsylvania M&A requires approval by policy makers in both New Jersey & Pennsylvania Average Monthly Campaign Contributions by PSEG $14,262 $9,578

$2,807 Typical Month $2,379 M&A-Window Month Interesting Phenomenon for Research Why different political strategy? the same firm, the same policy issue at the same point in time, the same general policy making process across the two states

We also observe: Time variation in firm strategy within a single state Cross sectional variation in firm strategy within a single state The Political Market (Public Politics) (Buchanan & Tullock, 1962; Bonardi, et. al. 2005; Baron, 2013) Public policy outcomes (determine firms nonmarket performance) Demanders of public policies Policy Issue -Focal Firm

-NGOs, Activists -Other Firms Special Interest Groups Suppliers of public policies - Elected Officials Medium of Exchange Votes, Information Financial support, other Political Strategy - Regulators - Courts Political Institutions

Political Markets Framework: Assumptions about Demanders & Suppliers Firms maximizing profits: compare the p(x) vs p(y)-c(y) For examples: Holburn & VdB (2004); Baron (199x; 20xx); Shotts (2016) Willing to influence for policy y in the political market place if p(y) - p(x) > c(y) Politicians also maximizing an objective function made up of:

Ideal policy: electoral (Mayhew, 1974) and ideology (Kalt & Zupan, 1984) Utility of policy outcome relative to ideal: (e.g., Shepsle & Bonchek, 1996) Politically valuable resources received from the firms political strategy U(x(j) vs. U(y(j) + C(y) (e.g., Grossman & Helpman (2001) Willing to support policy y if C(y) > U(x(j)) U(y(j)) Obvious question: What is the likely policy outcome x without Interest Group influence? Model the decision making of the Suppliers Public policy outcomes (determine firms nonmarket performance) Demanders of public policies

Policy Issue -Focal Firm -NGOs, Activists -Other Firms Special Interest Groups Suppliers of public policies - Elected Officials Medium of Exchange Votes, Information Financial support, other Political Strategy

- Regulators - Courts Political Institutions Positive Political Theory (PPT) Unpacking political institutions vs. Government as a self-interested but unitary actor (e.g., Stigler, 1971; Peltzman, 1976) In late 1980s and early 1990s, PPT emerged as scholars realized that policy maker behavior within single political institution may be influenced by behavior in other political institutions Legislatures and Agencies (e.g.., McCubbins, Noll & Weingast 1987 & 1989, Calvert, McCubbins & Weingast, 1989, Banks and Weingast 1992, de Figueiredo & Vanden Bergh 2003 and 2004) Agencies and Courts (e.g., Spiller and Spitzer 1992, McCubbins, Noll, & Weingast 1997, Tiller and Spiller 1999)

Pivotal Politics (e.g., Krehbiel 1998, 1999) a simple PPT model with implications for Political Strategy Assumptions Single dimensional policy space Preferences of Policy Makers Each policy maker has an Ideal Policy Single Peaked Utility function Pol #1 Pol #2

Need a Collective Action Rule Utility for Pol #1 Low Weak Utility for Pol #2 Assume: Simple Majority Voting High Strong Pivotal Politicians Median Voter Theorem (Black, 1948) Given assumptions:

MV is key to gaining support for a policy change within single political institution Policy changes move toward MVs ideal policy Policy located at MVs ideal policy is an equilibrium x* MV Change Voting Rule different Pivotal Politician X* = MV If x0 to the left of MV

Policy moves Utility for MV If x0 to the right of MV Policy moves Interaction Across Political Institutions (e.g., Holburn & Vanden Bergh, 2004 & 2008) Simple PPT model -- Regulator, Legislature & Executive Incorporate Institutional Rules Governing Process Step 1: Regulators define the Social Cost of Carbon for a Carbon Tax Simple Majority among commissioners; MV ideal policy $60 per tonne of CO2

Step 2: Legislature may overturn the Regulator with a new law Simple Majority required for new policy otherwise regulatory decision stands MV ideal policy $40 per tonne of CO2 Step 3: The Executive must agree with Legislatures proposed policy otherwise regulatory decision stands Ideal Policy $50 per tonne of CO2 Simple PPT model -- Regulator, Legislature & Executive Incorporate Institutional Rules Governing Process Step 1: Regulators define the Social Cost of Carbon for a Carbon Tax Simple Majority among commissioners; MV ideal policy $60 per tonne of CO2 Step 2: Legislature may overturn the Regulator with a new law Simple Majority required for new policy otherwise regulatory decision stands MV ideal policy $40 per tonne of CO2

Step 3: The Executive must agree with Legislatures proposed policy otherwise regulatory decision stands Ideal Policy $50 per tonne of CO2 Simple PPT model -- Regulator, Legislature & Executive Incorporate Institutional Rules Governing Process Step 1: Regulators define the Social Cost of Carbon for a Carbon Tax Simple Majority among commissioners; MV ideal policy $60 per tonne of CO2 Step 2: Legislature may overturn the Regulator with a new law Simple Majority required for new policy otherwise regulatory decision stands MV ideal policy $40 per tonne of CO2 Step 3: The Executive must agree with Legislatures proposed policy otherwise regulatory decision stands

Ideal Policy $50 per tonne of CO2 PPT stylized example of regulators decision Legislature MV Executive Regulator MV $40 $50 $60

Social Cost of Carbon ($/tonne of CO2) What is the equilibrium policy choice? Use Backward Induction Step 3: Regulator considers Executives Decision XR = $60? Legislature MV $40 Executive $50 Social Cost of Carbon ($/tonne of CO2)

Regulator MV $60 Step 3: Regulator considers Executives Decision XR = $60? Legislature MV $40 Executive $50 Social Cost of Carbon ($/tonne of CO2) Regulator MV $60

Step 3: Regulator considers Executives Decision Alternative policies the Executive prefers vs $60 XR = $60? Legislature MV $40 Executive $50 Social Cost of Carbon ($/tonne of CO2) Regulator MV $60 Step 2: Regulator considers Legislatures Decision

Given Executives set of preferred alternatives, Legislature proposes an alternative XA $41 XR = $60? XA $41 Legislature MV $40 Executive $50 Social Cost of Carbon ($/tonne of CO2) Regulator MV $60

Step 1: Given response by Legislature & Executive, Regulators choice of XR = $60 is NOT an equilibrium. XA $41 Legislature MV $40 Executive $50 XR = $60? NO Regulator MV $60 Social Cost of Carbon ($/tonne of CO2) Step 1: Given threat by Legislature & Executive,

Regulator chooses policy close as possible to its ideal policy X*R = $50 Legislature MV $40 Executive $50 Executive represents a constraint Pivotal Social Cost of Carbon ($/tonne of CO2) Regulator MV

$60 Comparative Statics Consider a political environment with one difference: Regulators ideal policy = $45 Different Distribution of Ideal Points in the Regulatory Commission Different Equilibrium Policy X*R = $45 Legislature MV Regulator MV $40 $45 Executive

$50 Regulator not constrained by Executive or Legislature Regulator is Pivotal Social Cost of Carbon ($/tonne of CO2) Comparative Statics Consider one more change : Regulators ideal policy = $35 Different Distribution of Ideal Points in the Regulatory Commission Different Equilibrium Policy Regulator X*R = $40 MV

Legislature MV $40 $35 Executive $50 Legislature represents constraint Pivotal Social Cost of Carbon ($/tonne of CO2) 3 Political Contexts -- Incorporate Firms preferences Legislature MV $40

X*R Legislature MV Regulator MV $40 $45 Regulator X*R MV Legislature MV $40 $35 X*R Executive $50 Executive

$50 Executive $50 Social Cost of Carbon ($/tonne of CO2) Regulator MV $60 FIRM Testable Implications - Firm Political Strategy Firm will target their political strategy at the Pivotal Institution At times firms implement strategy to indirectly influence

Pivotal politician within pivotal institution Empirical Support for the Pivotal Politics approach Pivotal Institutions (e.g., Holburn & VdB, 2007, 2014; deFigueiredo & Edwards, 2016) Pivotal Politicians within institutions (e.g., Snyder, 1990; Grier & Munger, 1991; Stratmann, 1995; VdB & Holburn, 2007; Cooper, Gulen and Ovtchinnikov, 2010) Limitations of theoretical model presented: Assumes all policy makers have homogeneous capabilities in crafting policy. Wiseman & Volden (2016) develop a model with heterogeneous capabilities across legislatures. Other than identifying pivots for firms to allocate strategy on the

margin, this model says nothing about the detailed design and implementation of the firms strategy No competing interest groups? Model effect of Demanders Public policy outcomes (determine firms nonmarket performance) Demanders of public policies Policy Issue -Focal Firm -NGOs, Activists -Other Firms

Special Interest Groups Suppliers of public policies - Elected Officials Medium of Exchange Votes, Information Financial support, other Political Strategy - Regulators - Courts Political Institutions Demand Side of Political Market: Degree of

Rivalry Private Politics vs. Public Politics literature on stakeholder rivalry Boycotts, protests, civil suits (e.g., Lenox & Eesley, 2009) Negative performance impact (e.g., King & Soule, 2007) Firms strategically pre-empt govt response (Lyons & Maxwell, 2016) Perhaps more consistent interaction with rivals in public politics Theoretical models of interest group competition argue rivalry positively related to political strategy costs (e.g., Baron, 2001; Bonardi, et.al., 2005; Grossman & Helpman, 1994) Very little empirical tests of firm political strategy responses to the degree of rivalry (for a recent exception see de Figueiredo & Edwards, 2016). Corporate Political Strategy in Contested

Regulatory Environments: Evidence from the Electric Utility Industry Adam Fremeth, Ivey Business School University of Western Ontario Guy Holburn, Ivey Business School University of Western Ontario Rick Vanden Bergh, University of Vermont A stylized model of the regulatory process Initiation Hearings Regulatory decisions

Judicial and political oversight Firm or Regulator Ex post court Stakeholder regulator can issues rule or appeal by participation initiate Administrative order parties

a rate increase of $446.1M (about a 10% increase) Seeking - Approval, Ex post e.g. application hearings fornew drugModernization denial, political review governed by Plant approval, modification

APAs Environmental Compliance - Conditional - Evidenceconstruction Cost increases from storm reserve funding and nuclear permit, M&A, Rationalization based - Expert utilitydecommissioning

rate review testimony Case launched a year and a half after that last increase of 9%. Hotly contested (13 intervenors) and received significant media attention. This Project How does the degree of rivalry from other Demanders of Policy in the regulatory arena influence the intensity of a firms corporate political strategy? Whats the mechanism that may allow such influence to operate? Rivals in Regulatory Arenas (Institutional details)

Administrative Procedure Act provides mechanism for engagement in regulatory process. (e.g., de Figueiredo & Vanden Bergh, 2004; McNollGast, 1987 & 1989) Relatively low bar to enter a case as an intervenor Funds provided to such groups (often paid for by the firm) Opportunity to access confidential firm records, present evidence, question witnesses Regulated firms benefit from information asymmetries, so when stakeholders enter they can reshape the informational environment by providing data and arguments the commission would not otherwise have (e.g., Stigler, 1971; Fremeth & Holburn, 2012)

1. Set the record straight about Dukes performance relative to competitors 2. Highlight shortcomings in Dukes current investment plans 3. Propose Specific solutions that reap benefits for ratepayers, the environment, and investors Consider relevant variation in the institutions: Experience of Regulators Experienced regulators can more effectively discern the quality of information presented (e.g., Fremeth & Holburn, 2012; Bolton, et. al. 2016)

Incentive for a firm to influence a regulator Rely on in depth knowledge and past interactions with firms & intervenors through political channels in response to a with personal insight into the plans and proposals of both more contested environment varies based on experience regulator. the Less likely to be swayedof by the weaker arguments or political pressure Expect the information processing capabilities of longer tenured

regulators to be greater, enhancing their ability to overcome information asymmetries Experienced regulators are more likely to be pivotal Predictions 1. Firms make greater political campaign contributions in more contested environments 2. The positive relationship between firm campaign contributions and degree of rivalry is moderated negatively by the experience of the regulators Data and Summary Statistics 25,066 firm-month-year observations 1999-2010 All investor owned utilities across 48 states 182 Firms Several data sources: Energy Information Administration,

state regulators, National Institute on Money in State Politics, etc. Variables Mean Standard Deviation Monthly Campaign Contributions $2,589 $12,938

7.4 6.2 1678 923 Intervenors in last rate case Days of Experience Other Response of Campaign Contributions to Contestation Campaign Contributionsits = 1Intervenorsits + 2 Experiencets+ 3-12Xist + feist + ist

Intervenors Experience 114.869*** (34.149) -0.395*** (0.102) Includes firm, state and month-year fixed effects. Robust standard errors clustered by firm in parentheses. *p<0.1; **p<0.05; ***p<0.01 One Standard Deviation increase in the number of Intervenors in the last rate case increases monthly campaign contributions by 28%

Response of Campaign Contributions to Contestation moderated by Regulator Experience (Interactions) Campaign Contributionsits = 1 Intervenorsits + 2 Experiencets+ 3Intervenorsits*Experiencets+ Marginal Effect of an Additional Intervenor Experience Min Mean - 1 std. dev. Mean - 1/2 std. dev. Mean Mean + 1/2 std. dev. Mean + 1 std. dev. Max 198.79***

159.85*** 135.43*** 111.07*** 86.66** 62.30* -232.39 Models Include firm, state and month-year fixed effects. Robust standard errors clustered by firm. *p<0.1; **p<0.05; ***p<0.01 As the collective experience of a regulatory commission increases, a firm decreases their campaign contributions

in response to the presence of an additional intervenor Design and implementation of Political Strategy Public policy outcomes (determine firms nonmarket performance) Demanders of public policies Policy Issue -Focal Firm -NGOs, Activists

-Other Firms Special Interest Groups Suppliers of public policies - Elected Officials Medium of Exchange Votes, Information Financial support, other Political Strategy - Regulators - Courts Political Institutions

Medium of Exchange (i.e., types of action) Campaign Finance (Money) Money Changes Hands from firm to policy-maker Lobbying (Information) No money changes hand, only information directly from firm to policy-maker Constituency Building (Votes) Information to and mobilization of voters needed for reelection Empirical Issues for Campaign Contribution Ansolbehere, de Figueiredo & Snyder (2003) inconsistent findings linking contribution patterns to policy/performance Positive (e.g., Kau, Keenan, Rubin 1982; Stratmann (1991, 1995, 2002)

None/negative -- (e.g., Wright, 1990; Langbein, 1993; Hadani & Schuler, 2013) Potential solutions from pivotal politics approach Identifying Pivotal Institution, Pivotal Politician empirically challenging Coarse measure of distribution of ideal points (partisan control of political institutions) Nominate scores may provide help (e.g., Poole & Rosenthal, 1991; McCarty & Shor, 2011) Identify alignment between contributions and pivots Nickerson & Silverman (1997 & 2003) study of TCE alignment & firm survival in Trucking Challenging to disentangle consumption vs investment Type of contributor & incorporate salient policy timing Lobbying Opportunities to link recent findings to Pivotal Politics/Institutions - E.g., Blanes I Vidal, et.al. 2012, Faccio, 2006, Faccio, et. al. 2006 Do the value of ties vary with linked to pivotal politician.

Firm organizational choices of political actions Make vs. Buy De Figueiredo & Silverman (2001) lobbying the FCC Jia present a new paper at SIOE in Paris Internal Organization of nonmarket activities Minor (2016) -- variation in degree of integration across firm vs. separate division Interesting research opportunities Direct linkages between political strategy and performance in policy outcomes and/or in economic value captured Identify alignment between theoretical political markets prediction & strategy employed -- Aligned strategies see better

performance a.la. Nickerson & Silverman, 2003 Interesting research opportunities Connection between political activities theoretically and empirically Combinations of political activities that link to political market context Need to develop data sets that combine lobbying & contribution data Dorabantu, et. al. using a governance based logic to synthesize present at SIOE at Paris 2016 Sustainability of political strategy Organizational alignment Developing Capabilities Jia & Mayer (2016) Thank you! Demand Side of Political Market: Degree of

Rivalry Which Interest Groups Act in Political Market and Why? Scholars assume other interest groups maximizing profit: For examples see: Keim & Baysinger (1985); Baron (1995; 2013) Interest Groups act if Benefits of political action outweigh Costs (Baron) Benefits Costs Vis--vis relevant political institutions -- constituency connection of Interest Group free-rider problems (Olson, 1965) How prevalent is intense rivalry in politics markets? Baumgartner & Leech (2001)

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