Canadian Political Contributions and Election Outcome
Gervan Fearon, University of Toronto, and Marie Rekkas, University
of Toronto at St. George
This paper investigates the impact of the source of political contributions on election outcome and the likelihood of a political party winning an election. This investigation is conducted through the development of a theoretical framework involving asymmetric information about a candidate's abilities and the estimation of a model for testing the hypotheses emerging from the theoretical framework. In the 1997 Canadian election, the five major political parties received 98 percent of the $38.2 million in total political contributions and represented 72 percent of the 1672 candidates competing for office in 301 political ridings across Canada. These five political parties include: the Reform Party of Canada (Reform), the Liberal Party of Canada (Liberal), the Progressive Conservative Party of Canada (PC), the New Democratic Party of Canada (NDP), and the Bloc Quebecois (BQ).
The main sources of political contributions to Canadian political parties include: individual contributors, businesses, trade unions, political organizations, registered parties, and other contributors. Political contributions are used to cover campaign costs associated with a candidate's efforts to win office in a political riding. In Canada, Elections Canada is responsible for the official reporting and publication of data on political contributions and expenditures. These data are released after elections are held and, hence, do not provide a direct source of information or signal to influence election outcomes. Additionally, political parties and interest groups would have an incentive to misrepresent the size and source of political contributions if these contributions were positively correlated to the probability of being elected. Self-reporting by political parties or interest groups to the general public may therefore not be credible.
In the literature, several frameworks have been put forth regarding the role of political contributions and election outcomes. Mueller (1989) suggests that the probability of winning an election is positively related to the level of political contributions. Similarly, Helpman and Persson (1989) suggest politicians may have preferences over political contributions and interest groups make political contributions as an approach to influencing the policy choices of politicians. From these authors and others, the level of political contributions is emphasized and the source of the contribution is considered to be less important.
An alternative framework for political contributions is proposed by the signalling liturature. Lohmann (1995) suggests that interest groups make political contributions to facilitate signalling about policy position by political parties and, hence, the level of contributions may be small relative to the donor's financial resources and anticipated benefits. Grossman and Helpman (1994) suggest that political contributions relay information about a candidate's abilities to raise funds and represent an endorsement of candidates by donors. The role of informed as opposed to uninformed voters and, in other words, the source of contributions and endorsements is important here as also suggested by Fedderson and Pesendorfer (1996), Gersbach (1998) and Baron (1989). In these works, the source of political contribution is emphasized and the level is less important.
Most of the empirical work on political contributions has focused on the effect of total contributions on election outcome. Morton and Cameron (1992) provide a survey of this literature. The literature on the effect of political contribution by source is sparse with Depken (1998) providing a rare representation of this research. Depken (1998) reports that contributions have a varying effect on election outcome depending on the source of these contributions and links these effects to the number of votes attached to the contributions by source. Hence, contributions are implicitly presented as a proxy for endorsements by interest groups or individuals possessing a block of votes. A formal theoretical framework that supports the empirical research is not provided by Depken (1998). In this present study, a formal model is presented and consistent empirical analysis is conducted.
The specific questions addressed in the study are as follows: First, does the source of political contributions affect political outcomes. Second, how to the different sources of contributions influence the likelihood of candidates from the five major parties winning office in a political riding. Third, what is the empirical relationship between political contributions, spending and campaign expenditure limits within the Canadian setting. If the source of political contributions are found to be significant at the political party level by riding, then the results would tend to support the hypothesis that political contributions tend to facilitate signalling by political candidates as opposed to representing a politician's direct extraction of utility from contributions.
The questions raised in the study are addressed through the development of a theoretical framework involving asymmetric information and political contributions from informed and uninformed agents in a sequential game. The game represents an extension of Gersbach's (1998) model to include a candidate's management ability in conducting a costly political campaign prior to the election and the formation of beliefs by voters based on Bayes' rule.
The study contributes to the literature on the political economy of elections by extending Gersbach's (1998) model to include costly political campaigning and signalling as well as including political contributions. Furthermore, the predictions of the theoretical framework are empirically tested. The results support the predictions that the sources of contributions matter and that these contributions can be anticipated to cover the costs of high ability candidates while being bounded away from expenditure limits or the financial requirements of the low ability candidates.