The political economy of investment: Sclerotic effects from interest groups

Article history: Received 2 February 2009 Received in revised form 1 November 2009 Accepted 13 December 2009 Available online 22 December 2009 We investigate the relationship between interest group activity and investment by analyzing an unbalanced panel of observations on 126 countries over three time periods. We find that the number of interest groups in a nation is negatively related to investment, consistent with a sclerotic effect due to rent-seeking by interest groups. Our findings are robust to the inclusion of a variety of additional common controls in the specification, to potential outlying observations, and tovaried sample-selectionprocedures.Wedofind, however, that the sclerotic impact of groups on investment is stronger across developed OECD countries than for the developing non-OECD countries. Effects also tend to be stronger in democratic nations, but are dependent upon how strict a definition of democracy is used. © 2009 Elsevier B.V. All rights reserved. JEL classification: D72 E20 01