Public Choice (2007) 133: 107–110
DOI 10.1007/s11127-007-9180-y
Campaign finance reform and electoral competition:
Comment
Thomas Stratmann · Francisco J. Aparicio-Castillo
Received: 21 November 2006 / Accepted: 19 April 2007 /
Published online: 26 May 2007
© Springer Science+Business Media, BV 2007
Abstract Campaign finance regulation is an important issue for democracies. Proponents
of stricter contribution limits believe it will improve competitiveness. Opponents argue that
contribution caps are just a mask for incumbency protection. This paper comments on John
Lott’s 2006 article in “Campaign Finance Reform and Electoral Competition” in Public
Choice.
Keywords Campaign contribution limits · Competitiveness of candidate elections
Campaign finance regulation is an important issue for democracies. Proponents of stricter
contribution limits believe it will improve competitiveness of elections. Opponents argue
that limits are just a mask for incumbency protection. Both sides can draw support from the
theoretical literature, thus the question is empirical. Understanding which model is a better
description of the effects of campaign finance limits is not only important in distinguishing
among theoretical models, but also in assuring competition (and the potential for competition) between candidates in democracies.
In referring to his own 1987 work on reputation, John Lott suggests that the theory as to why campaign finance regulations entrench incumbents is straightforward.
However, more recent theoretical advances suggest that stricter contribution caps do
not necessarily amount to incumbent protection. Some of the micro-founded models
on campaign finance, such as those by Prat (2002), Coate (2001, 2004), and Ashworth
(2006a, 2006b) predict situations when campaign finance limits may either increase or de-
T. Stratmann ()
James M. Buchanan Center, George Mason University, ID3, Carow Hall, Fairfax, VA 22030, USA
e-mail: tstratma@gmu.edu
F.J. Aparicio-Castillo
CIDE - División de Estudios Políticos, Toluca, Mexico
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crease electoral competitiveness. It is an empirical task to determine which model is correct.1
In his paper “Campaign Finance Reform and Electoral Competition” John Lott questions
our findings in our Public Choice article entitled “Competition policy for elections: Do
campaign contribution limits matter?” (Stratmann and Aparicio-Castillo 2006)2 in which
we examine the effect of campaign finance limits on the competitiveness of state assembly
elections, and the effect of the contribution limit amount on the competitiveness of these
elections. In contrast, Lott studies whether a contribution limit has an effect on the competitiveness of state senate elections. While we find that contribution limits increase competitiveness of elections, Lott finds the opposite result. When reviewing the existing literature,
Lott suggests that our results are due to the implausibility of one of our instruments in one
contribution limit amount regression, and he argues that our estimates are sensitive to alternative specifications, claiming that the instrumental variable (IV) results seem to be “very
sensitive to how they are specified.”
To respond to those comments, the main findings in our article do not hinge on the one
specification of the IV model in the contribution limit amount regressions, nor on the IV
strategy in general. In our paper we examine two issues. One is the effect of introducing
contribution limits in a situation when previously there were not limits. The second issue is
the effect of various contribution limit amounts, given that there is a limit in place. When we
examine the effect of the introduction of a contribution limit (from unlimited contributions),
we do not rely on IV to identify the effect. In these regressions the endogeneity problem
occurs in part because legislators may change the law ins order to increase their election
chances, and therefore the law is endogenous in the incumbent vote share equation. To
address this issue in our study, we examine the effect of the introduction of contribution caps
on future legislator generations who are unable to change the law themselves. This research
design is not subject to the concern that the estimates are biased due to the legislators passing
campaign finance limit legislation when expecting to benefit from changed laws. This is
because legislators who become incumbents after the law is passed, could, by definition, not
have voted in favor of the campaign finance law.
This research design addresses the effect of reputation building because we isolate the
effect of reputation by dividing the sample into two sets, namely incumbents who have built
reputation until the point the new campaign finance law is implemented, and incumbents
who become legislators after the law is in effect. We predicted that legislators with less
reputation are more affected by contribution limits than those with more reputation, and we
found support for this hypothesis. Our estimates show that the largest effect of the campaign
finance limit law falls on generations of incumbents who became legislators after the law
was implemented. These latter legislators face more competitive elections when there is
a contribution cap.
When Lott suggests that findings are very sensitive to specifications, he refers to the regressions with the campaign finance limit amounts, not to our analysis of whether a change
from unlimited to limited contributions or vice versa has an effect on electoral competitiveness. In particular, this statement refers to a subset of the specifications where we analyze
the effect of campaign contribution limit amounts, namely columns 5 and 6 of Table 5. In
1 Whether voter welfare is higher or lower with increased competitiveness is a related, but separate issue. In
Ashworth (2006a, 2006b), for example, when allowing for incumbency advantages tighter regulations makes
elections more competitive, i.e. the incumbent is at more risk of losing the election. However, in this model
even when caps lead to increased competitiveness contribution caps can raise or lower welfare.
2 In his article Lott (2006) cites a version of our paper.
Public Choice (2007) 133: 107–110
109
this particular specification we use the absolute seat difference in state assemblies as an
instrument. In other IV specifications in Table 5 we use measures of Democrat control as instruments for contribution caps. In all specifications we find that stricter limits lead to closer
elections by a few percentage points.
The instrument in question is the size of the state assembly majority, measured as the
number of seats that the majority party has as an advantage over the minority party. The idea
behind using this variable as an instrument is that when a party has a large advantage, the
current campaign finance regime presumably works in favor of that party, and that in this
case the party is less likely to implement a change in campaign finance laws. Lott argues
that the result that higher limit amounts lead to lower margins of victory falls apart when
using the percentage difference. He claims that “Replacing the absolute control with the
percentage difference between the two parties eliminates any statistically significant results”
(Lott 2006, p. 265). This statement is not correct.
In footnote 23 of our article we state that the results are robust when we use the percentage difference in the number of seats. When estimating the regression with the absolute
percentage difference in the number of seats between Democrats and Republicans, using
the same specification in our Table 5 column 5 (Stratmann and Aparicio-Castillo 2006), the
point estimate is 3.95 and the standard error 1.78, confirming our published results. Further,
our results are robust when using alternative instruments, namely the share of Democrat
seats, whether Democrats have a majority in the state assembly, and an interaction term
between these two variables.
Lott writes that he prefers specifications that have measures of Assembly, Senate, and
Governor control as instruments, and reports that our results are not robust to such a specification. When investigating this claim we noticed that Assembly and Senate size have
a significant non-linear effect on the contribution limit amount. When using as instruments
the share of seats of Democrats in the Senate, in the House, their squares, and an indicator
for a Democrat governor, the point estimate remains statistically significant with the sign
reported in our paper. In particular the point estimate for our baseline specification in 2.62
with an standard error of 0.82, and for the specification in Table 5, column 6 the point estimate is 1.11 with a standard error of 0.54. These results show that our results are robust to
alternative configurations of instruments.
Our work showing that contribution limits increase competitiveness does not stand alone
in the literature. For example, Besley and Case (2003) find that stricter state regulations on
corporate contribution limits increases party competition in the state legislature.3
As empirical researchers we are deeply concerned with doing careful analysis on this important issue and seek to understand the effects of contribution limits on democracy. Given
that Lott finds such large negative effects of campaign finance limits on competitiveness of
elections, and we find relatively modest positive effects, one may wonder what explains the
difference in the findings. The main difference does not seem to hinge on the fact that we
examine election to the state assembly, and that Lott examines elections to the Senate, but
that Lott includes primaries and open seats in his analysis of whether contribution limits
amount to incumbency protection.
Professor Green examined Lott’s data (that are used in Lott’s Public Choice article) for
the BCRA court case, and Professor Green is questioning Lott’s results that were subsequently published in the 2006 Public Choice article (Green 2003). As pointed out by Profes3 Contrary to Lott’s claim that Stratmann (1992) argues that contributions are not made to get their preferred
candidate elected, but to influence voting behavior (footnote 12), Stratmann (1992) suggests in that paper that
contributors are motivated by both objectives, not just one of them.
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sor Green, Lott analyzes the vote margin of the top two candidates, regardless as to whether
one of the candidates is an incumbent, regardless of whether an incumbent participated in
the race, and regardless as to whether the election was a primary or a general election. Fiftyseven percent of Lott’s observations are from races in primary elections. Green (2003) notes
that of Lott’s over 20,000 observations, less than 5,000 observations involve an incumbent
facing one challenger in the general election.4 He analyzes Lott’s data using a subset of
races where an incumbent meets a challenger, and found that the basis for the claim that the
contribution limits reduce the vote share of challengers results from the construction of the
dependent variable, where Lott mixes open seat races, together with incumbents running for
reelection, some being unopposed, others not (Green 2003).
References
Ashworth, S. (2006a). Campaign finance and voter welfare with entrenched incumbents. American Political
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Ashworth, S. (2006b, forthcoming). The economics of campaign finance. In L. Blume & S. Durlauf (Eds.),
The new Palgrave Dictionary of economics (2nd edn). Palgrave: Macmillan.
Besley, T., & Case, A. (2003). Political institutions and policy choices: Evidence from the United States.
Journal of Economic Literature, American Economic Association, 41(1), 7–73.
Coate, S. (2001). Political competition with campaign contributions and informative advertising. Journal of
the European Economic Association, 2(5), 772–804.
Coate, S. (2004). Pareto-improving campaign finance policy. American Economic Review, 94(3), 628–655.
Green, D. P. (2003). The impact of the BCRA on political parties: A reply to La Roja, Lott, Keller, and Milkis.
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Prat, A. (2002). Campaign advertising and voter welfare. Review of Economic Studies, 69(4), 997–1017.
Stratmann, T. (1992). Are contributors rational?: Untangling strategies of political action committees. Journal
of Political Economy, 100, 647–664.
Stratmann, T., & Aparicio-Castillo, F. J. (2006). Competition policy for elections: Do campaign contribution
limits matter? Public Choice, 127(1), 177–206.
4 When analyzing the vote margin in Tables 4 and 5, our paper analyses only incumbents in general elec-
tions. Focusing on contested races, tends to increase the coefficient on contribution limits. For example, the
point estimate increases from −4.4 in Table 4, column 1 to −6.9 and the point estimate remains statistically
significant.