This award provides support for preliminary research into two examples of the effects political factors have on firms' economic decisions. The project addresses the hypothesis that firms' decisions are affected not only by their customers and their competitors, but also by pressure from the general public and policy makers. While previous studies have found evidence that political pressure affects firms that are subject to direct economic regulation, this work extends the analysis of political constraints to unregulated firms. It is particularly important to understand the channels through which political interests influence firm behavior in the absence of direct price and entry regulation, given the recent moves to deregulate a number of industries, including electricity, telecommunications and airlines. This research provides an important benchmark for policy decisions, and offers new evidence on the nature and determinants of firms' political power. The first project considers the effects of the one million dollar tax deductibility cap on executive compensation. The tax cap reflected rising public discontent with `excessive` levels of executive compensation, and discussions of the legislation served to focus public attention on executive pay levels. This project considers the extent to which compensation has been affected by the added small, though real, tax and administrative costs, and by incentives to make pay more sensitive to firm performance. The second project considers the extent to which pharmaceutical companies preemptively lowered their prices during 1993 as the Clinton administration discussed regulating drug prices as part of health care reform legislation.
