Interest group politics in a federation
Journal of Public Economics, 94 (9-10):
730-748 (2010)Abstract
The optimal degree of decentralization depends on the importance of
inter-state externalities of local policies. We show that inter-state
externalities are determined by the spatial distribution of interest
groups within the country. Interest groups who have multi-state scope
internalize inter-state externalities to a larger extent than the
lobbyists with interests within a single state. We use variation
in the geographic boundaries of politically-powerful industrial interests
to estimate the effect of inter-state externalities on firm performance.
Using firm-level panel data from a peripheralized federation, Russia
in 1996-2003, we show that, controlling for firm fixed effects, the
performance of firms substantially improves with an increase in the
number of neighboring regions under influence of multi-regional business
groups compared to the number influenced by local business groups.
Our findings have implications for the literatures on federalism
and on international trade as trade restrictions are a common source
of inter-state externalities. © 2010 Elsevier B.V.