Rent Seeking by Agents of the Firm

Abstract

This study examines the role of managers’ political campaign contributions in relation to their firms’ tax benefits. The study differs from extant public choice literature that has not examined the role of self‐interested agents within the firm. Using a major tax law change, we find that firms’ political action committee contributions and individual managers’ campaign contributions are both positively associated with firm tax benefits (rents) at stake. We also observe these contributions to be an increasing function of managers’ wealth effects through the existence of bonus plans that are based on after‐tax earnings and ownership of the firm’s stock. The policy implications are that firms’ own tax benefits, as well as its managers’ individual wealth‐enhancing effects, may influence campaign contributions.