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Essays on Political Finance

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This dissertation is a broad study on individual and firm-level financial conditions and their effects on politics. In the first chapter, I study the effect of economic conditions on political polarization using micro-data on house prices, mortgages, and individual political contributions. I argue that shocks to housing wealth --- the largest asset for most households in the U.S. --- lead to political polarization. Using the housing market bust of 2007-2011 as an empirical laboratory, I show that negative shocks to housing wealth increase political polarization. The richness of the data enables me to use individual heterogeneity in housing location and timing of home purchase to disentangle changes in personal wealth from other factors that might be at play in determining political polarization. The effect of housing shocks on polarization is stronger during the crisis, and cannot be attributed to reverse causality or changing neighborhood composition. Survey evidence comparing homeowners and renters shows that only homeowners polarize in response to house price shocks, while renters do not --- suggesting that house price shocks are not merely a proxy for other economic shocks. Furthermore, extreme politicians benefit electorally from negative house price shocks to their contributor network, whereas moderate politicians are hurt by negative house price shocks. Financial crises destabilize politics, which then can feed back into the crisis. These results provide insight into the difficulty of adopting structural economic reforms following financial crises. In the second chapter, I study common ownership. Common ownership of public companies by a limited set of large, institutional investors is on the rise. This paper looks at the effects of common ownership on the competition for political favors. To do this, I combine data from SEC 13F filings on mutual fund holdings of firms, with political contribution data by firm political action committees. In the struggle for government favors by consumers and firms, an effective reduction in the cost of firm coordination can reduce welfare. I show that when the common ownership between two firms increases through mutual fund acquisition of their stock, the firms converge in political donation behavior. The effect of common ownership on firm political donations is amplified by the concentration of ownership by mutual funds: when fewer funds hold ownership stakes in both firms, political donations become more similar than when ownership is more dispersed among funds. This result is important because reduced political competition between powerful interest groups can increase the deadweight costs to consumers of rent extraction from the government by firms.

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