The Market for Political Consultants

Gregory J. Martin and Zachary Peskowitz

Abstract Popular and scholarly accounts of congressional campaigns emphasize the role that political consultants play in shaping campaign strategy. Yet, we know very little about the factors that determine congressional candidates decisions to hire consulting rms. In this paper, we investigate whether the network of hiring relationships between candidates and consultants resembles a competitive market allocation. That is, do more productive rms - those able to provide greater electoral impact at lower cost - capture a larger share of the market for consulting services? We answer these questions using a novel dataset of candidate-consultant relationships and monetary transfers. Our main nding is that consultants whose clients win upset victories are rewarded with substantially more revenues in the next cycle; however, the market entirely ignores the more ne-grained information available in the form of candidates vote shares. Using a simple mathematical model of candidate learning, we show that neglecting unanticipated vote share outcomes and focusing on the binary win-loss outcome, as candidates appear to do, limits the degree to which candidates can learn about dierent rms abilities. This censored learning process may prevent lower-quality established rms from being supplanted by higher-quality entrants, even over long periods of time. We speculate that factors other than consultant eectiveness, such as personal connections or party organization, drive hiring decisions in the marketplace for political consultants.

Assistant Professor, Emory University, gregory.martin@emory.edu. Assistant Professor, Ohio State University, peskowitz.4@osu.edu.

Introduction

Political consultants are the architects of contemporary congressional campaign strategy. Consultants help candidates develop advertisements, shape campaign platforms, and allocate scarce resources across dierent campaign activities (Sabato, 1981; Shea, 1996). Almost all competitive candidates hire at least one consulting rm to provide expert guidance. Even as the eects of campaign communication strategy take a more central role in the study of elections (Druckman, Kifer and Parkin, 2009; Gerber et al., 2011; Gerber, Kessler and Meredith, 2011), little is known about the behavior and motivations of the rms who are responsible for creating campaign messages. Some research has examined the average eect of hiring political consultants. For example, studies have examined whether hiring professional political consultants increases House candidates vote share (Medvic and Lenart, 1997; Medvic, 2001) and campaign contributions from political action committees (Herrnson, 1992). We study the marketplace for political consultants, with a specic emphasis on how consulting rms electoral performance aects future revenues. We ask whether the market for political consulting services is ecient in the sense of incorporating all available information about the quality of dierent consulting rms. Using a variety of methods and specications, we show that candidates use unanticipated victories of consultant clients to make inferences about the quality of consulting rms and guide their hiring decisions. However, candidates appear to ignore the unanticipated portion of vote share outcomes, which are strictly more informative than the binary win-loss outcome. These results suggest that candidates ability to learn about which rms are more eective than others is censored in an important way. A consulting rm with sucient prestige to have some discretion over which clients to accept or reject could manipulate this learning process by choosing to work only for likely winners. The incentive to work for likely winners arises not simply because a winning client is likely to generate repeat business in the next cycle, but also because of the inferences about the rms eectiveness that other candidates in the market will draw upon observing a client win. This censored learning process has important implications for the composition of the political consulting market. As the unconditional reelection probability of House incumbents is in the neighborhood of 90 percent (Diermeier, Keane and Merlo, 2005),

there is little chance of an incumbent client generating a negative shock to the rms reputation. The uncompetitiveness of most Congressional races limits the degree to which a high-quality entrant rm could capture market share from established rms, and hence may allow unproductive rms to persist in the market over long periods of time. With less-than-perfect information about consultant eectiveness available, candidates may rely more strongly on other factors such as personal connections in making hiring decisions. To implement our analysis, we collected a novel data set of federal candidates expenditures on political consultants. Every election cycle, Campaigns and Elections magazine lists a roundup of the political consulting rms hired by candidates for a wide array of federal and state-oces. We examined back issues of Campaigns and Elections and extracted the name of each listed political consulting rm. We then matched the rm names to a database on campaign expenditures of federal candidates maintained by the Center for Responsive Politics. We classify consultants into dierent rm specialization types based on their functional expertise.1 Table 1 and Figure 1 report summary statistics on total billings and number of rms across specialization types.

Cycle Total Expenses 2002 $210M 2004 $626M 2006 $316M 2008 $871M 2010 $343M Table 1: Total expenditures on consulting rms in federal elections, 2002-2010 (in real 2000 dollars)

Equipped with these data, we examine the eciency of the marketplace. Using a wide variety of covariates, we rst estimate models of the electoral performance of congressional candidates. To guard against omitted variable bias, we control for baseline expectations of candidate electoral performance using the Cook Political Report, inOur specialization categories are media, general, direct mail, polling, fundraising, telemarketing, internet, get out the vote, opposition, strategy, public relations, legal, and other.
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cumbency, and national partisan swings. We then use the residuals from these models, divided by the rms revenues, as measures of consultant productivity.2 By averaging these residuals across all of a consulting rms candidate clients we are able to obtain an estimate of each consulting rms productivity. We show that consulting rms revenue in the next cycle jumps if their clients win unexpected victories, but there is no response to increases in unanticipated candidate vote share. Together, our ndings suggest a somewhat dierent picture of the role of consultants than currently emphasized in scholarly and popular accounts of the market for political consultants. Reputation in the electoral arena is an important predictor of future business, suggesting that career concerns are an important force shaping consultant behavior. Importantly, consultant incentives appear to be broadly aligned with candidates primary interests of reelection. This contrasts with the popular arguments of Klein (2006) and Armstrong and Zuniga (2006) and scholarly arguments of Walton and Weller (2009). However, the information that candidates use when hiring consultants is quite coarse, which leaves room for divergence between candidate and consultant interests. The divergence is most clear in the case of a heavily favored candidate: for instance, an incumbent facing a challenger with no previous experience in elective oce. Such a candidate might be best advised to hire no professional consultants and save his or her campaign resources for a more competitive future race. However, because rms reputations appear to be aected by wins alone and not vote shares, every consulting rm would like to work for this candidate, who is very likely to generate a small but positive boost to the rms reputation with very little risk.

Background

The scholarly literature on political consultants has generally focused on the eects of consultants on various campaign outcomes. Herrnson (1992) studies how the presence of consultants aects congressional candidates fundraising from political action committees. He nds that the employing professional consultants increases candidates contributions. Medvic and Lenart (1997) use a similar research design with vote share as
We dene a more productive rm as one that generates more electoral impact at lower cost; thus our productivity measures are all dened in per-dollar terms.
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the dependent variable of interest and also nd that the use of consultants is associated with improved electoral performance. Medvic (2001) elaborates on these arguments and examines other electoral outcomes, such as voter turnout. As the presence of consultants has become more widespread in congressional campaigns, research has begun to disaggregate the eect of consulting rms. Using a novel survey, Grossmann (2009a) studies variation in business practices across consulting rms. He devotes much of his study to analyzing dierences in billing structures between consulting rms. He nds that there is heterogeneity in whether rms charge at fees, take a proportion of total candidate expenditures, or include victory bonuses in their contracts with candidates. He nds no signicant dierences in compensation contracts between Democratic and Republican rms. Cain (2011) examines how consulting rms of dierent quality aect expectations about congressional election outcomes. He categorizes consultants using both an expert classication of consulting rms into tiers and rms previous won-loss records. He nds that hiring high reputation rms has a signicant eect on elite expectations of race competitiveness. Grossmann (2009b) examines how the utilization of negative campaign advertising varies across consulting rms. Walton and Weller (2009) argue that there are moral hazard problems in the marketplace for consultants. They contend that rms may have incentives to maximize their own revenues, by for example devoting excessive resources to advertisements, over the probability that the client candidate wins elections. To examine these issues empirically, they analyze the binary hiring decisions of candidates and nd that candidates frequently change consultants from election to election. They contend that these results suggest that moral hazard is endemic in the marketplace. In contrast to their approach, we examine how rm performance aects future revenue from the entire population of congressional candidates and also utilize information about the electoral performance of candidates relative to baseline expectations to determine what factors determine hiring in the marketplace for political consultants.

Model

To organize and interpret the empirical results presented later in the paper, we develop a model in this section of a candidates decision of which consulting rm to hire. We

begin from the assumption that hiring decisions are motivated by electoral performance. That is, candidates want to hire the rm(s) that can provide the maximal electoral impact, subject to some budget constraint. We also assume that candidates cannot directly determine rms eectiveness; they must attempt to learn the ability of a rm by observing the performance of the consultants clients in elections. We model this learning process as a sequence of Bayesian updating steps. The candidate begins with a prior belief about the rms quality and then observes a sequence of elections in which the consulting rm participates. Following each election, the candidate updates her belief to incorporate the new information. The candidate believes that the process governing realizations of the consultants clients election outcomes is as follows: sD j = (j + q +
ex 1+ex ; j)

(1)

Where sD j is the vote share of the Democratic candidate in election j ; is the logistic function: (x) = candidate;3 j is an election-specic xed eect, which is known to the
j

q is the consultants eectiveness, or quality; and

is an iid error term

drawn from a normal distribution. Electoral performance in this world is determined by a combination of the match between candidate and electoral district, an additive boost generated by the consulting rms participation, and an unpredictable component. The challenge for the candidate is to separate the consultants contribution from the noise. The candidate forms beliefs about the consultants quality by combining observations of election outcomes with a prior belief, which we will take to be:
2 g0 (q ) N (0, q )

(2)

The choices of parametric and functional forms here are made for simplicity and ease of simulation. The specic functional forms we selected are not essential for the qualitative predictions discussed below to hold; what is important is that election results have some unpredictable component unrelated to consultant quality.
3

The election xed eect here represents commonly-known expectations about the likely outcome in a given election; for example, that a Democratic candidate in Massachusetts is likely to perform better than one in Utah.

Learning from vote shares Suppose the candidate observes vote share outcomes
in each election. Then, given Bayesian updating, the candidates posterior belief follows the process dened by: log gj = log
sj 1sj sj 1sj

j q gj 1 (3) j q gj 1 dq

Where is the normal density. Beginning with a prior belief, the candidate sequentially updates to incorporate new information gleaned from election results. This generates a sequence of beliefs which, as the number of elections n grows large, converges onto the true value of q .

Learning from wins Suppose instead that the candidate discards the vote share
observation, and instead uses only the information contained in whether the rms client won or lost. Letting wj = 1 if the client wins and wj = 0 otherwise, the posterior beliefs are: gj = (1 (j q ))wi (j q )1wi gj 1 (1 (j q ))wi (j q )1wi gj 1 dq (4)

Where is the normal cumulative density function.

Simulation To illustrate how censoring the observation to a binary outcome reduces

the informativeness of election results, we conducted a simulation of the processes dened by Equations 3 and 4. We generated 100 observations of election results for several values of j , representing more or less predictable elections: j {0, 0.25, 1}. These values generate expected Democratic vote shares of 50 percent, 56 percent, and 73 percent, respectively. We then computed posterior beliefs following each realization using either the vote share or the binary win-loss outcome.4 Figure 2 clearly shows the consequences of censoring on the quality of information revelation. When elections are very competitive ( = 0), learning from wins is almost as good as using the full vote share information - both processes fairly quickly approach the true quality value of 0.1. But once elections become even slightly tilted in favor of
Other relevant parameters for the simulation were the consultants true quality q , set to 0.1, the standard deviation of the prior belief, set to 0.03, and the standard deviation of the noise term in the election outcome, set to 0.1.
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one candidate ( = 0.25) the speed of learning in the censored process falls dramatically. In very uncompetitive races ( = 1), there is essentially no information to be gained from observing wins, and the wins-only process never departs from the prior. Notably, the real-world electoral environment in Congressional elections is much closer to the = 1 case than to the more competitive cases, particularly in elections involving an incumbent candidate. This observation implies that, if observers pay attention only to wins and not vote shares, elections involving Congressional incumbents are likely to be almost completely uninformative about the quality of the consulting rms involved. A consulting rm with suciently established reputation to be capable of selectivity in its choice of clients could take advantage of this fact by choosing to work only for incumbents. Such a strategy would essentially halt the learning process, locking in the rms reputation indenitely and preventing observers from learning any new, potentially unfavorable, information about the rms ability.

Data

Our analyses of the market for political consultants rely on a novel dataset of candidateconsultant dyads in US congressional elections from 2002-2010. We are able to match each candidate with the consulting rms (if any) that the candidate hired, and identify the amount the candidate paid to each rm. The dyadic nature of the dataset allows us to disaggregate consultant spending to the rm level and consider the possibility that electoral eectiveness may vary by rm.

4.1

Identifying the set of political consulting rms

We identify the names of active political consulting rms in each of the election cycles from 2002-2010 using the end-of-cycle election summaries published by Campaigns and Elections magazine. After every two-year election cycle, the magazine publishes a feature called Win-Loss. This feature includes a list of the rms who worked for active campaigns that cycle, along with a brief description of their expertise, partisan aliation, and the win-loss record of their clients in that years elections.

Firm names We took the names of consulting rms listed in Campaigns and Elections, and standardized them by removing punctuation, common abbreviations, and varying capitalization. We then performed a manual check for rms that changed their names slightly over time. This process yielded a set of roughly 1250 unique rms operating at some point over our ve-cycle sample period.

Firm expertise The descriptions of rms expertise given by Campaigns and Elections are non-standard and not consistent over time. However, we were able to group the expertise labels into several broad categories reecting the dierent functions of consulting rms. These categories, in order of frequency of their occurrence in the data, are: 1. Media / advertising 2. General or full-service 3. Direct mail 4. Polling 5. Fundraising 6. Telemarketing 7. Internet specialists 8. Get out the vote, grass-roots organizing 9. Opposition Research 10. PR 11. Legal consulting Some of these reect quite dierent services from the typical conception of the role of a campaign manager. For instance, many of the direct mail specialist rms main product could be simply a targeted list of voter addresses. Since we focus our attention on the campaign strategy and advertising functions of consultants, in many of our analyses we exclude all but the rst two categories of rms. We also make use of the listed expertise in regressions where consulting rms market share, dened within expertise categories, is the dependent variable.

Partisan aliation All but one of the rms in the universe of 1250 that appear
in Campaigns and Elections over the sample period has a strict partisan aliation; e.g. a rm either works only for Democrats or only for Republicans.5 This feature of the market is interesting in that it indicates that there is at least one clear non-market inuence on the matching of candidates to rms. The segregation by party means that Republican candidates and Democratic candidates choose consultants from completely disjoint sets of rms. The strict partisanship of rms suggests that party organizations will have an eect on rms reputations and hence may be able to exert inuence over the matching process. When constructing our rm market share variable in the analysis, we dene market share within Democratic and Republican party aliations.

4.2

Candidate expenditures on consulting rms

We identify candidates relationships with consulting rms using the Federal Election Commissions campaign expenditures dataset, as organized and published by the Center for Responsive Politics (2013). Using our set of consulting rm names identied in the previous section, we scan the individual expense transactions of all candidates for any recipient names matching our list of rms. We keep the amounts of each transaction and aggregate to the rm-candidate level, so that our nal dataset has, for every candidate, a list of each rm hired and the amount spent on each. We consider a candidate to have hired a rm if the candidate reported any expenses paid to that rm in a given election cycle.6

4.3

Television advertising prices

In some of our specications, we predict the amount paid by a candidate to a rm given various rm- and candidate-specic covariates. Because in many cases consulting rms make purchases of advertising time on behalf of their clients, one important driver of candidate-to-rm payments might be the cost of television advertising in the candidates
The single exception to this rule was Roy Fletcher, Incorporated. Mr. Fletchers rm primarily worked for Democrats but had a state level Republican client at one point in the sample period. 6 The CRP identies expenses as associated with a given election cycle, and we follow their classication. Generally, they consider expenses paid between January 1 of the calendar year before the election year and December 31 of the election year to belong to that cycle.
5

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region (Martin, 2013). We collected data on advertising prices, in dollars per ratings point, in each of the 210 Designated Market Areas (DMAs) in the United States from the Media Market Guides published by Spot Quotations and Data (SQAD). We recorded the prices prevailing in the third quarter of each election year from 2002 to 2010. Because congressional districts and media markets rarely align (Snyder and Strmberg, 2010), we constructed, for each congressional district, a weighted-average price of all the markets with which the district overlaps. We weighted the prices by the fraction of the population in the district residing in a given media market.

Results

We employ several empirical analyses motivated by our theoretical perspective. First, we examine the relationship of electoral competitiveness to spending on consultants. Second, we construct a measure of rms productivity based on the portion of their clients election outcomes that are not predictable using commonly known ex-ante predictors. We look at how these measures of productivity relate to rms market share. Third, we examine candidates beliefs about cross-rm quality dierentials by exploring how a rms revenue in future elections responds to successes in the current election.

5.1

Strategic hiring of consultants

Past analyses of the electoral impact of consultants (c.f. Medvic and Lenart (1997)) have relied on an assumption of exogeneity between spending on consultants and the electoral environment in which a candidate competes. However, if candidates see hiring consultants as a means to achieving an end - namely, winning oce - then there is good reason to expect that candidates choices of consultants will depend strongly on their assessments of the prior likelihood of success. A candidate who foresees an easy victory has little reason to spend scarce campaign resources on high-priced consultants, whereas a candidate engaged in a close-fought battle has strong incentive to take any available action that might win him marginal votes, even if the cost is high. Figure 3 shows that this pattern is indeed clearly evident in the data. We plot a well-known measure of competitiveness against total consultant expenditures, and reveal a clear pattern that candidates in more competitive races spend more money

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on consultants. We measure competitiveness using the Cook Political Reports initial forecasts of election outcomes, which are released the February prior to each election.7 The gure includes expenses on all consulting rms in the data. The gure shows that expenditures are highest in races projected to be the most competitive. However, ex-ante competitiveness is far from a perfect predictor of candidates expenditures on consulting rms. Many candidates in clearly uncompetitive races those rated by Cook as Solid Republican or Solid Democrat - are paying substantial amounts to consulting rms. This pattern gives reason to speculate that candidates may have secondary objectives other than winning election in mind when hiring consultants. For example, candidates may use payments to consulting rms as a means to direct patronage to past supporters or staers.

5.2

Measures of consultant quality

In this section we construct measures of consulting rms productivity in generating electoral impact. Because it is possible that rms may be selecting candidates to accept as clients on the basis of their likely performance, it is not sucient to look at raw outcomes such as rms win/loss records or the average vote shares of their clients. Such measures will be biased due to selection if, for example, some rms disproportionately work for clients in uncompetitive races. Instead, we rst condition on commonly-known predictors of electoral performance, and extract the residual or unexpected portion of each candidates electoral result. Our set of performance predictors is very straightforward but nonetheless generates quite accurate predictions. Our independent variables are the forecasts of the Cook Political Report (described above) plus cycle xed eects, dummy variables for incumbency, and in some cases the total expenditures reported by each candidate in the race (Jacobson, 2012).8 Table 2 reports a regression in which the dependent variable is Democratic vote share; each observation is a single election. The predictive power of
The Cook report classies House races into one of eight categories. These are Solid Republican, Likely Republican, Lean Republican, and Toss-Up Republican, plus the same four categories on the Democratic side. We collapse the two toss-up categories into one, labeled T in the plot. The categories are ordered left to right in order of their favorability to Democratic candidates. 8 Specications without expenditures data include both House and Senate races; those with expenditures data include only House races.
7

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this set of covariates is quite high. R2 values in the basic OLS specications exceed 80%, and when district xed eects are included they approach 95%. The fact that election outcomes are so predictable implies that observers in the market for consultants - even those making less sophisticated heuristic assessments - ought to be able to account for factors other than rm skill when assessing the performance records of a rms clients. Among the best predictors of Democratic vote share are the Cook forecasts; the Solid Democrat (D3) rating is associated with a 17-point Democratic advantage.9 The incumbent party receives a 3-to-5 point advantage - somewhat smaller than what is typically estimated for House races due to the fact that the Cook forecasters use incumbency information in assigning their ratings. The Democratic waves of 2006 and 2008 are reected in the dummy variables for those cycles. Table 3 reports a regression with the same covariates, but this time using a dummy for Democratic victory as the dependent variable. Results are quite similar to those in the vote-share version, though with slightly lower R2 . To construct our measures of consultant productivity, we extracted the residuals from the regressions reported in tables 2 and 3.10 In the vote share case, the residual is the portion of the vote share not explained by easily-available predictors. The residual in the win-probability version represents the surprise of an election result; positive if a candidate won and negative if he/she lost. Because consultants often work for more than one candidate in a given election cycle, and candidates often hire more than one consultant, it was necessary to aggregate the candidate-level residuals in some fashion in order to construct a rm-level productivity measure. We carried out this aggregation as follows. First, we apportioned each candidates residual to the rms hired by that candidate on the basis of the candidates payments to each hired rm. So if candidate X spent $10,000 on rm A and $5,000 on rm B, we assigned two-thirds of Xs residual to rm A and one-third to rm B. In equation form: rtf k =
9 10

ptf k rtk f ptf k

(5)

The omitted category is races not rated by Cook. Residuals were constructed using the model reported in column (1) in each table.

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Table 2: Models of candidates vote share Coecient (Intercept) Cook Forecast: D1 Cook Forecast: D2 Cook Forecast: D3 Cook Forecast: R1 Cook Forecast: R2 Cook Forecast: R3 Cook Forecast: Tossup 2004 Cycle 2006 Cycle 2008 Cycle 2010 Cycle Incumbent Democrat Incumbent Republican Democrat Expenditure Republican Expenditure R2 N 0.805 2037 (1) 46.616 (0.770) 1.384 (1.281) 5.010 (1.279) 17.498 (1.233) 0.715 (1.200) -1.949 (1.199) -10.369 (1.158) 2.127 (2.055) 1.118 (0.509) 4.884 (0.535) 3.572 (0.527) -3.844 (0.571) 4.757 (1.196) -3.360 (0.916) (2) 46.664 (0.923) 2.472 (1.288) 6.002 (1.293) 18.321 (1.294) -0.020 (1.189) -2.978 (1.216) -10.871 (1.266) (3) (4)

1.954 (0.523) 5.372 (0.558) 3.990 (0.554) -3.789 (0.603) 2.382 (1.160) -2.370 (0.918) 7.217E-07 (3.298E-07) -5.546E-07 (2.554E-07) 0.818 1744

-0.055 (1.262) 0.776 (1.157) 3.685 (1.239) 0.682 (1.153) -1.106 (1.166) -6.155 (1.102) 0.412 (2.023) 1.644 (0.329) 5.832 (0.401) 5.500 (0.416) -2.567 (0.434) 5.468 (0.872) -3.508 (0.755)

0.547 (1.296) 1.718 (1.248) 4.981 (1.407) 0.765 (1.106) -0.837 (1.152) -5.102 (1.144)

0.938 2037

1.772 (0.365) 5.698 (0.434) 5.258 (0.454) -3.023 (0.497) 4.146 (0.800) -3.018 (0.742) 8.311E-07 (2.644E-07) -1.831E-07 (2.425E-07) 0.945 1744

Dependent variable is Democratic share of the two-party vote. Columns (1) and (2) are OLS; (3) and (4) include district xed eects. Robust standard errors are in parentheses.

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Table 3: Models of candidates win probability Coecient (Intercept) Cook Forecast: D1 Cook Forecast: D2 Cook Forecast: D3 Cook Forecast: R1 Cook Forecast: R2 Cook Forecast: R3 Cook Forecast: Tossup 2004 Cycle 2006 Cycle 2008 Cycle 2010 Cycle Incumbent Democrat Incumbent Republican Democrat Expenditure Republican Expenditure R2 N 0.776 2037 0.832 2037 (1) -0.428 (0.149) 0.225 (0.239) 0.779 (0.251) 2.049 (0.260) 0.018 (0.261) -0.087 (0.241) -1.541 (0.256) 0.088 (0.380) -0.059 (0.134) 0.961 (0.156) 0.557 (0.175) -1.114 (0.197) 0.937 (0.189) -0.555 (0.199) (2) (3)

0.018 (0.066) 0.036 (0.063) 0.111 (0.057) 0.052 (0.076) 0.061 (0.061) -0.131 (0.048) -0.123 (0.097) -0.004 (0.011) 0.085 (0.016) 0.105 (0.018) -0.077 (0.017) 0.135 (0.040) -0.067 (0.033)

-8.449E-04 (0.077) 0.041 (0.072) 0.157 (0.070) 0.020 (0.078) 0.054 (0.066) -0.092 (0.056)

-2.509E-04 (0.013) 0.064 (0.018) 0.086 (0.019) -0.100 (0.021) 0.078 (0.044) -0.054 (0.033) 5.436E-08 (1.434E-08) -1.809E-08 (1.198E-08) 0.838 1744

Dependent variable is a dummy for Democratic win. Columns (1) is a probit regression; and (2) and (3) are linear probability models. (3) includes district xed eects. Robust standard errors are in parentheses.

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Where in the above, rtk is the residual of candidate k in election t, and ptf k is the payment from candidate k to rm f in election t. Second, we constructed a rm-level weighted average of the apportioned residuals constructed in the rst step for each rm. We used weights based on the revenues received from each client as a share of the rms total revenues. So if rm A earned $10,000 from candidate X and $10,000 from candidate Y, we assigned rm A the average of the residuals from candidates X and Y. In other words: rtf = ptf k rtf k k ptf k (6)

Finally, we divided this weighted-average residual by the rms total billings in a given cycle (
k

ptf k ), to arrive at our measure of productivity. The measure is in units

of electoral impact (either in vote-share or win-probability terms) per dollar.

Party

Dem

Rep

Firm Name 2010 Revenue ($K) GMMB 17,415 Novak Media 1,048 Campaign Network 130 Brand Strategy 22 FieldWorks 215 OnMessage 5,887 Communications Counsel 197 Wilson Grand Communications 142 Baldwin Group 69 Anthem Media 1,686

Table 4: Consulting rms with highest win-productivity in 2010, by party.

Table 4 shows, for each party, the ve rms which had the highest win-productivity residuals in the 2010 election cycle. The group includes some well-known, high-grossing rms as well as smaller, more specialized rms. All 10 rms had win-productivity values at least 50 times higher than the median rm in 2010.

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5.3

Candidate beliefs

With our productivity measures in hand, we investigated how productivity in the previous period inuenced rms market performance in the subsequent period. As formalized in the model of section 3, candidates cannot observe rms quality directly; they must rely on the observed outcomes of elections in which the rm participates in order to infer it. Good news - a rms client winning his election - ought to cause candidates to raise their perceptions of the rms quality, and similarly bad news ought to depress candidate perceptions. Before proceeding with the more sophisticated measures of rm performance described in section 5.2, we rst looked at how a rms revenues in future elections respond to electoral success in the current election with a simple xed-eects regression.11 Column (1) of Table 5 shows that for the average rm, an additional client winning her campaign produces a statistically signicant $15,000 in additional expected revenues in the next cycle. Given the typical size of rms in the industry - where the median rm earns around $70,000 per cycle from Congressional campaigns - this is a moderate but non-negligible increase in revenue. The base specication of column (1) assumes that all wins inuence candidate perceptions of the rms quality equally, which is unlikely. For instance, some incumbent candidates in safe districts are so heavily favored to win that having worked on a successful campaign for them does not provide much of a signal of a rms ability. In column (2) we split out races in which the rms client was an incumbent running against a challenger who had not held prior elective oce, a case in which prior research on congressional elections has shown the incumbent to be heavily favored (Jacobson, 2012). The dierence between the two cases is quite dramatic. The expected wins produce an impact on future revenues that is estimated to be negative (but not significantly dierent from zero).12 The unexpected wins, on the other hand, produce a large positive impact of over $80,000 in expected revenue in the next cycle. Thus, the median-sized rm can expect that a single such victory will roughly double its revenues in the next cycle.
We use rm-level xed eects, so that only within-rm variation in revenues aects the coecient estimate. 12 Such a victory counts as both a win and an expected win, so the total impact is the sum of the two coecients given in table 5.
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Table 5: Fixed-eects regression of rm revenues on previous wins. Coecient Last Cycle Wins Last Cycle Expected Wins 2006 Cycle 2008 Cycle 2010 Cycle R2 (Within) R2 (Total) N 0.007 0.746 1,564 0.016 0.746 1,514 (1) 15,082 (6,490) (2) 82,912 (58,899) -92,389 (62,845) (3) 14,034 (6,368) (4) 87,804 (60,537) -101,262 (65,447) 84,319 (39,078) 57,507 (50,113) 208,373 (103,607) 0.027 0.749 1,514

85,816 (38,977) 27,108 (38,108) 168,522 (90,741) 0.016 0.748 1,564

Dependent variable is current cycle revenues. Firm xed eects are included in each column; standard errors (in parentheses) are robust and clustered at the rm level. Last Wins is number of clients worked for in the previous cycle who won their campaign. Last Expected Wins is the same but includes only incumbent clients running against challengers who had not held previous elective oce.

The nal two columns of the table repeat columns (1) and (2) with the addition of cycle xed eects. The coecient estimates are quite similar in this case. Given the evidence from this simple specication that rms market outcomes respond very dierently to surprising election outcomes than to unsurprising ones, we next proceeded to investigate the impact of our measures of consulting rms electoral impact from section 5.2. Our rst specication models a rms market share in the current period as a function of the productivity measures described above (in both winand vote-share terms) in the previous period. We constructed market shares as a rms share of the total revenues going to all rms with the same party aliation and expertise category. We regressed each rms market share in period t +1 on its market share in period t and the rms productivity in period t. Because the productivity measure is an estimated quantity, the usual standard

18

error calculation is inappropriate. Instead we computed bootstrap standard errors by resampling from the election dataset, re-estimating the regressions in tables 2 and 3, re-computing productivity as described above, and nally estimating the second-stage regression of market share on estimated productivity. Bootstrapped standard errors computed from 5000 bootstrap resamples are reported in table 6. The rst two columns of table 6 are OLS regressions, using the rms previousperiod market share as a regressor to account for persistence over time. Market shares exhibit strong persistence; on average, a rm retains nearly 90 percent of its previousperiod share. Insofar as rms market shares are a function of candidates perceptions of their electoral impact, this persistence indicates that candidates beliefs change relatively slowly. The third column accounts for persistence using rm xed eects. Both specications show the same main result; previous-cycle productivity in surprise win terms has a signicant and positive eect on current-cycle market share. The eect of productivity in vote share terms is insignicant, with negative point estimate.

Coecient Prev. Cycle Productivity (VS)

(1) -367 (345) Prev. Cycle Productivity (Win) 0.043 (0.011) Prev. Cycle Market Share 0.887 (0.016) 2006 Cycle 2008 Cycle 2010 Cycle (Intercept)

(2) (3) -373 -485 (339) (389) 0.043 0.054 (0.012) (0.014) 0.886 (0.016) -0.004 -0.009 (0.004) (0.003) 0.005 -0.006 (0.003) (0.003) 0.002 -0.017 (0.004) (0.004) 0.002 0.001 (0.001) (0.003)

Note: Bootstrap bias-corrected estimates, with bootstrapped standard errors in parentheses.

Table 6: Second stage regression of rms market share on productivity measures.

Table 7 reports results of a similar regression exercise with a dierent dependent

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variable. Here, each observation is a rm-candidate pair, and the dependent variable is the amount of the payment made from the candidate to the rm (ptf k ). This specication allows us to include some candidate-specic controls that are likely to inuence how much revenue a rm earns and were by necessity omitted from the rm-level regression in table 6. We include the Cook forecast for the candidates race, the candidates total fundraising in the cycle from individual donors, and the measure of the cost of television advertising described above. Candidates in races predicted to be uncompetitive spend less on consultants, even within the subset of candidates who chose to hire at least one rm. The coecient on fundraising is positive, indicating that the typical consultant captures between 3 and 6 percent of its clients total fundraising dollars. The advertising price coecient is negative, suggesting that in high-cost regions candidates substitute away from television advertising. Again, we account for the observed high degree of persistence in the dependent variable in two ways. In the rst two columns, we include as a regressor the payment made between the same pair of candidate and rm in the previous cycle. The typical rm can expect to receive about 45 cents from a candidate in the current cycle for every dollar in contracts it got from that candidate in the previous cycle, suggesting substantial persistence in relationships between rms and candidates. In the third column, we include candidate-rm xed eects to account for this persistence. The main result in this specication is similar to the last; increases in productivity in surprise win terms predict increases in the price a rm is able to charge its clients, indicating that candidates are paying attention to rms win/loss records and consider them an indication of quality. Increases in productivity in vote share terms here actually decrease the price that rms can command. This is further evidence that unexpected wins are the driver of rms revenues; all of the action is coming from close wins near 50%, and further increases in vote share beyond that have no eect.13 This apparent distinction between victories and vote share performance may have important consequences for the behavior of consulting rms. Because marginal increases in vote share are worth little while crossing the threshold of 50% is worth a lot, consultants for underdog candidates are likely to be risk-loving: faced with a choice of a low-variance strategy versus a high-variance one, the consultant may well
If the vote-share-productivity term is included in the regression alone (without the win-productivity term) the coecient is insignicantly dierent from zero.
13

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Coecient Prev. Cycle Productivity (VS)

(1) -2.002E+09 (6.102E+08) Prev. Cycle Productivity (Win) 210,100 (57,320) Prev. Cycle Payment 0.445 (0.012) Cook Forecast - D1 -5,615 (6,251) Cook Forecast - D2 6,897 (5,605) Cook Forecast - D3 -30,557 (5,205) Cook Forecast - R1 7,207 (5,156) Cook Forecast - R2 -9,004 (5,681) Cook Forecast - R3 -29,491 (4,941) Fundraising Total 0.033 (0.001) TV Advertising Price Index 2006 Cycle 2008 Cycle 2010 Cycle (Intercept) 16,661 (2,583) 1,406 (2,112) 5,129 (2,189) 38,046 (5,341)

(2) -2.005E+09 (5.903E+08) 209,300 (57,000) 0.445 (0.012) -5,232 (6,295) 8,078 (5,601) -27,849 (5,291) 8,002 (5,225) -8,209 (5,684) -28,638 (4,919) 0.033 (0.001) -8.286 (1.446) 17,243 (2,573) 2,296 (2,114) 5,134 (2,183) 39,147 (5,312)

(3) -4.238E+08 (8.349E+08) 77,920 (41,030)

13,199 (10,158) -15,926 (12,150) -32,405 (10,828) -1,526 (9,055) 14,435 (10,880) -6,593 (8,154) 0.058 (0.004) -46.155 (7.374) 13,608 (3,157) 3,632 (3,416) 2,256 (3,160)

Note: Bootstrap bias-corrected estimates, with bootstrapped standard errors in parentheses.

Table 7: Second stage regression of candidate-to-rm payments on productivity measures

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prefer the high-variance strategy even if it is dominated in expected value terms.14 The incentives are reversed for consultants working for favored candidates. Hence, a revenue-maximizing consultants incentives are aligned exactly with those of a purely oce-motivated candidate. These results suggest that Congressional candidates believe that rms possess persistent dierences in their ability to impact elections, and are willing to pay more for rms with higher perceived ability. They appear to use the rms record of election wins and losses - rather than how well its clients perform relative to expectations to infer this ability. For this purpose, some elections are much more informative than others. From the rms perspective, the large rewards to winning elections relative to marginal improvements in vote share imply that the revenue-maximizing rm may prefer to adopt riskier strategies. Another consequence of this behavior on the part of candidates is that it is very dicult to learn about rms that work for incumbents, as incumbents tend to be very likely to win their races with or without the participation of consultants. Combining the simulation results of section 3 with the empirical results presented here, one should expect that incumbent clients, whose unconditional reelection probabilities are quite high, ought to provide little information on a rms quality to observers. Table 8 shows some evidence consistent with this hypothesis. The table reports three variants of a rm-level regression where the dependent variable is the rm exiting the market.15 As one might expect, larger rms (those with more clients in one cycle) are less likely to exit the market in the next cycle. However, the marginal eect of having additional incumbent clients is much lower - i.e., these clients reduce the likelihood of the rm exiting in the next period more - than the eect of additional challenger clients. In some specications the challenger-client marginal eect is positive, implying that more challenger clients is associated with a higher likelihood of exit. These dierential eects are consistent with a world where incumbent races are much less likely to reveal (possibly negative) information about the rms ability.
A recent example of such a choice might be the 2008 McCain campaigns selection of Sarah Palin as McCains running mate. Campaign insiders later admitted that they knew little about Palin prior to the selection, but decided that such an unorthodox choice was necessary to shake up an election McCain was unlikely to win by running conservatively. 15 Each observation here is a rm-election cycle. We classify a rm as exiting the market if it appears in our dataset in one election but does not in the next.
14

22

Coecient Prev. Cycle # Incumbent Candidates

OLS -0.006 (0.002) Prev. Cycle # Challenger Candidates 0.002 (0.003)

Notes: N=2310. Robust standard errors in parentheses.

FE Cox Hazard -0.001 -0.238 (0.002) (0.034) 0.008 -0.081 (0.004) (0.043)

Table 8: Regressions of rm exit on number of incumbent and challenger clients.

5.4

Regression Discontinuity Results

The above analysis broadly suggests that the win and loss history of consulting rms clients, as opposed to their vote-share performance, drives future revenues to rms. To examine this more closely, we conduct a regression discontinuity design (Angrist and Lavy (1999)) that exploits local variation in the electoral performance of consulting rms clients around the 50 percent vote-share threshold. Above this threshold, consulting rms record an additional electoral victory while below this threshold they record a loss. This suggests estimating the equation: Revenueit = i + t + W CloseW insi,t1 + L CloseLossesi,t1 + (7)

it

where close wins and close losses are dened by a symmetric interval around the 50 percent threshold.16 Under the assumption that wins and losses are randomly determined in the close election interval, this approach allows us to identity the eect on future revenues of winning an election, conditional upon the vote-share result lying in the close interval. This method is able to accommodate unobserved heterogeneity in rm characteristics through the presence of rm xed-eects. Table 9 reports the estimated results for Equation 7, with six dierent denition of the close election interval. Across all six specications, the coecient estimate on close wins is dramatically larger than the coecient estimate on close losses, typically on the order of $100,000. To formally test the hypothesis that the coecient on close wins is greater than the coecient on close losses (W > C ), we compute the Wald
The approach diers from standard regression discontinuity designs (Lee, 2008) due to the complication that each consulting rm has multiple clients.
16

23

Table 9: Regression discontinuity Coecient Vote-share interval 2006 cycle 2008 cycle 2010 cycle Close Wins Close Losses Wald stat. One-sided p R2 (Within) R2 (Total) N (1) (2) (45, 55) (47.5, 52.5) 97,800 92,172 (39,666) (37,836) 7,085 23,965 (38,115) (39,265) 151,456 153,397 (85,906) (89,411) 99,320 52,257 (50,720) (45,729) -25,585 -29,659 (28,834) (37,978) 3.354 2.037 0.034 0.077 0.018 0.010 0.752 0.750 1555 1555 (3) (48, 52) 92,601 (38,782) 11,448 (37,690) 146,966 (86,593) 102,998 (55,615) -35,431 (46,562) 3.928 0.024 0.012 0.750 1555 (4) (48.5, 51.5) 91,038 (38,881) 29,591 (41,315) 154,930 (89,326) 47,857 (67,231) -52,941 (45,754) 2.121 0.073 0.009 0.750 1555 (5) (49, 51) 90,099 (39,376) 32,301 (39,651) 155,829 (90,046) -7,572 (95,701) -34,222 (62,063) 0.118 0.366 0.008 0.749 1555 (6) (49.5, 50.5) 90,342 (39,159) 34,084 (38,705) 157,135 (90,269) 8,846 (117,252) -89,120 (101,169) 0.394 0.265 0.009 0.750 1555

Dependent variable is current cycle revenues. Firm xed eects are included in each column; standard errors (in parentheses) are robust and clustered at the rm level. Each column reports dierent denitions of close wins and losses where the vote-share interval is listed above the column. The Wald statistic is calculated for the null hypothesis that the coecient on close wins is equal to the coecient on close losses.

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test statistic using the heteroskedasticity-robust variance-covariance matrix. Up to the (48.5, 51.5) vote-share interval, we reject the null hypothesis that the coecients are equal at conventional levels of signicance. Once the vote-share interval tightens to (49, 51) and (49.5, 50.5), the dierence between the coecients is no longer precisely estimated.17 The electoral performance of rms clients outside of the close election interval is also likely to have an eect on future business. To examine the robustness of the regression discontinuity results, we repeat the regression discontinuity with additional controls to capture consultants electoral performance. We include the number of wins and losses that are not in the close election interval, the number of wins of incumbent clients against inexperienced challengers, and the vote-share residual described in the previous subsection. The results in Table 10 are broadly similar to the ndings without the additional controls. The point estimate on the close wins coecient is always dramatically higher than the coecient estimate on close losses. The standard errors are generally larger than the previous analysis. This analysis supports the claim that additional electoral victories generate large increases in future revenues for consulting rms.

Discussion

In this paper we have examined the eciency of the market for political consultants. The electoral performance of consultants clients has a substantively and statistically signicant eect on future consultant revenues. However, candidates fail to incorporate all available information about consultant quality embedded in the electoral performance of consultants clients. Instead of using deviations from expected vote share to drive hiring decisions, candidates appear to only use unanticipated victories as a gauge of candidate quality. We argue that this has important implications for which consultants are employed and lowers the average quality of consultants in campaigns. Consultants who enjoy an additional client victory experience an in increase in future rm revenue of approximately $210,000 compared to a substantively and statistically insignicant eect of improved candidate vote-share performance.
There are 1,350 wins and losses in the (45, 55) vote-share interval, but only 181 in the (49.5, 50.5) vote-share interval.
17

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Table 10: Regression discontinuity with additional rm controls (1) (2) (45, 55) (47.5, 52.5) 88,323 74,850 (41,185) (38,147) 2008 cycle 28,730 47,304 (40,120) (42,761) 2010 cycle 162,547 166,741 (91,864) (94,146) Close Wins 81,462 11,048 (46,368) (34,679) Close Losses -19,838 -43,816 (31,305) (43,694) Non-Close Wins 58,638 77,787 (41,445) (50,037) Non-Close Losses 5,242 7,673 (47,541) (36,971) Last Expected Wins -12,306 -12,694 (15,962) (16,072) Vote-Share Residual 1,590 1,876 (1,845) (1,925) Wald stat. 3.425 1.002 One-sided p 0.032 0.158 2 R (Within) 0.024 0.027 2 R (Total) 0.753 0.754 N 1555 1555 Coecient Vote-share interval 2006 cycle (3) (48, 52) 85,432 (39,761) 39,611 (39,170) 164,068 (93,107) 68,444 (45,599) -47,375 (52,754) 66,968 (42,028) 3,228 (35,763) -13,564 (15,952) 1,872 (1,854) 2.432 0.059 0.025 0.754 1555 (4) (48.5, 51.5) 78,534 (38,650) 58,761 (46,169) 168,247 (94,582) 6,156 (53,794) -70,132 (49,380) 77,116 (49,402) 2,677 (37,790) -13,195 (15,979) 1,906 (1,916) 1.352 0.123 0.028 0.754 1555 (5) (49, 51) 79,742 (39,997) 53,545 (42,925) 167,372 (93,443) -56,162 (80,754) -76,194 (64,929) 75,088 (44,504) 2,447 (37,117) -10,965 (15,728) 1,799 (1,909) 0.081 0.389 0.028 0.754 1555 (6) (49.5, 50.5) 85,020 (40,345) 44,601 (40,109) 167,339 (93,513) -32,303 (106,568) -109,415 (108,821) 67,741 (41,622) 3,389 (38,225) -11,220 (15,496) 1,886 (1,902) 0.243 0.311 0.026 0.754 1555

Dependent variable is current cycle revenues. Firm xed eects are included in each column; standard errors (in parentheses) are robust and clustered at the rm level. Each column reports dierent denitions of close wins and losses where the vote-share interval is listed above the column. The Wald statistic is calculated for the null hypothesis that the coecient on close wins is equal to the coecient on close losses.

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The presence of these censoring eects reduces the ability of candidates to learn about the true quality of consultants. Censoring the learning process also aects prospective entrants to the consultant marketplace. Compared to a marketplace where candidates use deviations from expected vote share to infer consulting rms quality, the ability of new entrants to improve perceptions of their quality is severely limited. This may serve to prevent the introduction of innovative and eective campaign strategies. Our dataset of candidate consultant expenditures can be used to analyze other questions about the eects of consultants on the conduct of political campaigns. In particular, these data can be used to understand how consultants strategy choices aect quality and how the obstacles to learning that we identify aect the strategies that are used in congressional campaigns. Most research on the causes of campaign strategy emphasizes candidate characteristics (Skaperdas and Grofman, 1995; Polborn and Yi, 2006). Future work could study how the presence of consultants aects campaign communications, such as the use of negative advertising, after controlling for the candidate characteristics that previous theoretical and empirical work have identied as explanatory variables in campaign strategy.

References
Angrist, Joshua D. and Victor Lavy. 1999. Using Maimonides Rule to Estimate The Eect of Class Size on Scholastic Achievement. Quarterly Journal of Economics 114(2):533575. Armstrong, Jerome and Markos Moulitsas Zuniga. 2006. Crashing the Gate: Netroots, Grassroots, and the Rise of People-Powered Politics. New York: Chelsea Green. Cain, Sean A. 2011. An Elite Theory of Political Consulting and Its Implications for U.S. House Election Competition. Political Behavior 33(3):375405. Center for Responsive Politics. 2013. create/data.php. Diermeier, Daniel, Michael Keane and Antonio Merlo. 2005. A Political Economy Model of Congressional Careers. American Economic Review 95(1):347373. http://www.opensecrets.org/resources/

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Druckman, James N., Martin J. Kifer and Michael Parkin. 2009. Campaign Communications in U.S. Congressional Elections. American Political Science Review 103(3):343366. Gerber, Alan S., Daniel P. Kessler and Marc Meredith. 2011. The Persuasive Eects of Direct Mail: A Regression Discontinuity Based Approach. Journal of Politics 73(1):140155. Gerber, Alan S., James G. Gimpel, Donald P. Green and Daron R. Shaw. 2011. How Large and Long-lasting Are the Persuasive Eects of Televised Campaign Ads? Results from a Randomized Field Experiment. American Political Science Review 105(1):135150. Grossmann, Matt. 2009a. Campaigning as an Industry: Consulting Business Models and Intra-Party Competition. Business and Politics 11(1):119. Grossmann, Matt. 2009b. What (or Who) Makes Campaigns Negative? Paper Presented at the Annual Meeting of the Midwest Political Science Association, Chicago, Il. April 2009. Herrnson, Paul S. 1992. Campaign Professionalism and Fundraising in Congressional Elections. Journal of Politics 54(3):859870. Jacobson, Gary C. 2012. The Politics of Congressional Elections, Eighth Edition. New York: Pearson. Klein, Joe. 2006. Politics Lost: How American Democracy Was Trivialized By People Who Think Youre Stupid. New York: Doubleday. Lee, David S. 2008. Randomized Experiments from Non-Random Selection in U.S. House Elections. Journal of Econometrics 142:675697. Martin, Gregory J. 2013. The Informational Content of Campaign Advertising. Working paper, Stanford University. Medvic, Stephen K. 2001. Political Consultants in U.S. Congressional Elections. Columbus, Ohio: The Ohio State University Press.

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Medvic, Stephen K. and Silvo Lenart. 1997. The Inuence of Political Consultants in the 1992 Congressional Elections. Legislative Studies Quarterly 22(1):6177. Polborn, Mattias K. and Daivd T. Yi. 2006. Informative Positive and Negative Campaigning. Quarterly Journal of Political Science 1(4):351371. Sabato, Larry J. 1981. The Rise of Political Consultants: New Ways of Winning Elections. New York: Basic Books. Shea, Daniel M. 1996. Campaign Craft: The Strategies, Tactics, and Art of Political Campaign Management. Westport, Conn.: Praeger. Skaperdas, Stergios and Bernard Grofman. 1995. Modeling Negative Campaigning. American Political Science Review 1(1):4961. Snyder, Jr., James M. and David Strmberg. 2010. Press Coverage and Political Accountability. Journal of Political Economy 118(2):355408. Walton, Nina and Nicholas Weller. 2009. Moral Hazard in Campaigns: Do Political Candidates Keep Hiring Their Consultants? Working paper, University of Southern California .

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80

Number of firms in sample

60

40

20

0 102 103 104 105 106

Mean percampaign revenues

Figure 1: Histogram of rms average total revenue per campaign (log scale)

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0.100

0.075 alpha = 0

0.050

0.025

0.000 0.100

0.075 alpha = 0.25

belief

learn_from vs win

0.050

0.025

0.000 0.100

0.075 alpha = 1

0.050

0.025

0.000 0 25 50 75 100

election

Figure 2: Simulation of learning processes using vote share vs. win information. 31

Candidate Expenditure ($)

0e+00
q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q q

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2002

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D3 D2 D1

Cook Forecast

Figure 3: Consultant expenditures by Cook election forecast

q

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2010 T
q q q

2004

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