Interest Group Competition and the Organization of Congress: Theory and Evidence from Financial Services Political Action Committees

Abstract

This paper develops a positive theory of how competition among political pressure groups shapes the organization of Congress and tests the theory using data on political action committees (PACs) in the financial services industries. For the Members of Congress, the first-best way to maximize PAC contributions would be auction their legislative service time for a fee to the highest bidders. Such contracts, however, are considered bribery and are not legally enforceable. The Congressional committee system may arise, we argue, as a second-best solution to mitigate the agency problems when "fee-for-service" contracts are not available. The committee system fosters repeated interactions and long-term relationships between the PACs and the members of the relevant committees. This structure facilitates the development of reputations which can reduce the uncertainty both for the PACs and for the members and thereby increase contributions.We then find supporting evidence in both cross-sectional and time-series contribution patterns. First, on the House Banking Committee, where relationships are high and uncertainty is low, the competing groups specialize their contributions by giving large amounts to different committee members. In contrast, for legislators who are not members of the Banking Committee, where relationships are low and uncertainty is high, the competing PACs simply match each others' low level of contributions. Second, as each member of the House Banking committee develops his reputation through time (hence reduces uncertainty), the sources of PAC contributions for that member become more concentrated in one of the rival groups. We conclude with implications of our theory for the effects of term limits, party discipline, and corruption on the organization of Congress.

JEL Classification: G28, D78, D72