Thomas Stratmann — Cronyism, Corruption, and Competition in Politics

The October 23, 2013, Lab seminar was presented by Edmond J. Safra Lab Fellow, Professor Thomas Stratmann. Professor Stratmann is University Professor of Economics and Law at George Mason University, and a faculty member at both the Center for Study of Public Choice and the interdisciplinary Center for Economic Science, as well as a fellow at the Mercatus Center. During his fellowship year, Professor Stratmann will undertake an empirical study of possible insider trading and politically motivated investing by members of the U.S. House of Representatives. During his Lab presentation, Professor Stratmann presented the group with the research methodologies he has employed to answer one of the central questions of his Lab project: do Representatives who sit on committees obtain abnormal market returns based on the superior information they possess about committee decisions affecting particular firms and industries? In addition to outlining the early stages of this Lab project, Professor Stratmann also shared research he is conducting which examines the effects campaign contribution limits have on reducing fundraising gaps between incumbents and challengers in state assembly races.

Professor Stratmann opened the seminar by providing Lab participants with a brief history of federal campaign finance laws beginning with the implementation of the Federal Election Campaign Act (FECA) in 1972. He described in detail how subsequent amendments and legal challenges have continually reshaped contribution limits, expenditure limits, and reporting requirements in federal elections. At this point in the seminar, Professor Stratmann presented several working hypotheses from his own research concerning the effects campaign contribution limits have on the competitiveness between incumbents and challengers in state assembly races. Professor Stratmann explained to the group that he chose to study state house races between 1996-2006 because variation across states and time is more prevalent than variations in campaign contributions in federal elections. Still, he hopes that by analyzing variation at the state level, that he will gain some insight into the relationship between incumbents and challengers and campaign contributions and competitiveness in federal elections.

Continuing with the presentation, Professor Stratmann shifted his attention to his current Lab Project examining insider trading in Congress and conflicts of interests in trading that mat arise from superior information obtained through committee membership. Prefacing his study with the recent passage of the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act 2012), Professor Stratmann explained that Congress has indeed expanded financial disclosures and made an effort to make such disclosures searchable. Still, he is concerned that committee assignments may give Representatives an unfair advantage in investing because of information they obtain in advance of the public, which may or may not influence certain market sectors, firms, or industries. One Lab participant voiced concern that even if Professor Stratmann finds abnormal market returns among certain committee members, that it would be difficult to prove if higher returns stem from advanced knowledge of a certain field or sector, or from insider information. As the participant reasoned, people specializing on a committee might just have a better understanding of public information, which would offer a more benign explanation for abnormal returns. Finally, there was consensus between members of the Lab on this issue, and a robust discussion ensued based on some of the preliminary data Professor Stratmann shared with group.

-Summary composed by Joseph Hollow