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Do Powerful Politicians Cause Corporate Downsizing?

Does public sector spending complement or crowd out private sector economic activity? This question, which has occupied economists for much of the past century, remains largely unresolved. Keynesian and neoclassical macroeconomic theories reach strong and generally conflicting conclusions regarding the ability of public spending to stimulate the private sector. A major obstacle limiting empirical progress on the topic is the difficulty in identifying changes to government spending that are truly exogenous. Because government behavior is influenced by developments in the private economy, changes in private sector investment and productivity confound the effects of government spending and the factors that cause that spending to change.

This paper offers a novel empirical approach that allows us to overcome this challenge and shed considerable light on the impact of government spending on the private sector. Our key innovation is to use changes in congressional committee chairmanship as a source of exogenous variation in state-level federal expenditures. Since chairmanship is determined almost entirely by seniority — to be appointed chair a congressman must simply become the most senior member of the party in power on that committee — this means that chair turnover can only result from the resignation (or defeat) of the incumbent, or a change in the party controlling that branch of congress. And because both of these events depend almost entirely on political circumstances in other states, ascension to chairmanship is essentially unrelated to events or conditions in the new chairman’s home state (e.g., most Senators will not even be up for election during the year of their ascension). We show that becoming a powerful committee chair results in a significant increase in federal funds flowing to the ascending chairman’s state. Thus, a congressman’s ascension to a powerful committee chair creates a positive shock to his or her state’s share of federal funds that is virtually independent of the state’s economic conditions.

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Publications and Working Papers

  • “Do Powerful Politicians Cause Corporate Downsizing?” (with Joshua Coval and Christopher Malloy), 2011.  Journal of Political Economy 199, 1015-1060.
  • “Friends in High Places” (with Christopher Malloy), 2014.  American Economic Journal: Economic Policy 6, 63-91.
  • “Legislating Stock Prices” (with Karl Diether and Christopher Malloy), 2013.  Journal of Financial Economics 110, 574-595.
    • Winner of Fama-DFA Prize for the Best Paper Published in the Journal of Financial Economics in the Areas of Capital Markets and Asset Pricing (Distinguished Paper), 2013.
  • “Resident Networks and Corporate Connections: Evidence from World War II Internment Camps” (with Umit Gurun and Christopher Malloy), 2015.  Journal of Finance, forthcoming.
    • Winner of First Prize, the Inaugural Hakan Orbay Research Award, 2015.

Working Papers

  • Shielded Innovation (with Umit Gurun and Scott Kominers), 2015.
    • (R&R, Review of Financial Studies)
  • “Mini West Virginias: Corporations as Government Dependents” (with Christopher Malloy), 2014.
  • “The Impact of Forced Migration on Modern Cities: Evidence from 1930s Crop Failures” (with Christopher Malloy and Quoc Nguyen), 2015.

HBS Course Materials

  • “Seeking Alpha in the Afterlife: CMG Life Services and the Life Settlement Industry,” Harvard Business School Case 213-104.
  • “Seeking Alpha in the Afterlife: CMG Life Services and the Life Settlement Industry,” Harvard Business School Teaching Note 213-149.
Lauren H. Cohen, Ph.D.

L.E. Simmons Professor of Business Administration, Harvard Business School
Editor, Management Science
Research Associate, National Bureau of Economic Research

  Lauren Cohen

Harvard Business School
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Boston, Massachusetts 02163

Tel : (617) 495-3888
Fax : (617) 496-8443
Mail : lcohen@hbs.edu