The Impact of Political Connections on Government Bailout: the 2008 Credit Crunch in the United States

Why is there so little money in contributions to political action committees (PAC) in United States’ politics? While there may be several explanations for this puzzle, we consider corporate PAC contributions as an insurance-like instrument that induces firms’ expectations of safeguard at times of grave need, with the 2008 credit crunch as a case in point. Given the unlikely occurrence of a credit crunch, few financial firms invest in PAC contributions. However, we find firms that make PAC contributions may gain ex ante benefits of corporate PACs as protection from financial distress by undertaking profitable but risky projects that later become illiquid assets while requiring the bailout money during the 2008 credit crunch. We also find that both consistent PAC investments over election cycles and subsequent lobbying activity to corporate PACs further allow firms to utilize their political ties as safeguard and demand additional bailout money. Our instrumental variable analysis confirms that firms with prior experience in political investments are found to enhance the likelihood and effectiveness of PAC contributions and related political investments.