Research Seed Grant | 1999-2000

Campaign Finance, Elections, and Local Economic Conditions

by Gregory Wawro and Charles Himmelberg (Business)

Campaign finance continues to be an important topic of concern in politics, political science, and economics. One innovative way that recent works have sought to advance our understanding of campaign finance has been to examine the role of dynamics in fundraising (Biersack, Herrnson and Wilcox 1993; Box-Steffensmeier 1996, Krasno, Green and Cowden 1994). A key consideration of these works is how money obtained early in the election cycle affects the success of candidates, not only in terms of attracting support of constituents and future contributors, but also in terms of deterring the candidacies of challengers who might draw away such support. By examining the dynamic nature of contributions, we can better understand the strategies of candidates and contributors and how these strategies favor certain candidates over others.

Yet the recent research on campaign finance dynamics has not exploited available data to its fullest to answer questions of interest. Although the Federal Election Commission's (FEC's) reporting and disclosure requirements enable us to use panel data models, researchers for the most part have neglected these powerful tools. One of the main advantages of using panel data methods is that they enable us to account for unobserved individual and temporal effects that, if not accounted for, can result in seriously flawed inferences. One of the main focuses of this project is to apply state of the art panel data methods to better assess the dynamics of campaign finance. In particular, we will examine the relationship between past and current campaign contributions to incumbents and challengers during several election cycles using dynamic panel data models. We will extend existing research by applying methods which have yet to be used in the study of campaign finance and, as far as we can tell, in the political economy generally.

We will also extend existing research by examining the effects of local economic conditions on contributions. Poor economic conditions at the local level may adversely affect incumbents seeking reelection. Voters may view a bad local economy as a reason to shift support away from the incumbent. If this is true, then contributors should consider local economic conditions when making contribution decisions. Using data on local unemployment and housing starts, we will examine the relationship between contributions and local economic conditions. A key focus of the work on campaign finance in the economics literature has been whether or not campaign contributors are rational (Stratman 1992, Snyder 1992). By estimating models that incorporate both local economic variables as well as contribution dynamics we can determine whether the rational behavior of contributors involves the use of objective economic information or whether contributors engage in `herd behavior' by relying more on the information contained in behavior of other contributors (cf. Banerjee 1992; Bikhchandani, Hirshleifer, and Welch 1992).