Interest Group Politics in a Federation

Journal article: 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.

Author(s)

Sergei Guriev, Evgeny Yakovlev, Ekaterina Zhuravskaya

Journal
  • Journal of Public Economics
Date of publication
  • 2010
Keywords JEL
D78 F15 F23 H77 P26
Keywords
  • Federalism
  • Interest groups
  • Inter-jurisdictional externalities
  • Inter-state trade barriers
  • Multinational firms
Pages
  • 730-748
Version
  • 1
Volume
  • 94