Policy Uncertainty and Manufacturing Investment: Evidence from U.S. State Elections

We estimate the effect of electorally induced policy uncertainty on investment in the manufacturing sector. Because state governors exercise considerable influence over legislation and considerable discretion over regulation and permitting, and because the policies relevant to business investment vary systematically by party, uncertainty over the partisan affiliation of the future governor is a source of political risk to firms considering business investment. More importantly, the lack of an incumbent in a race due to term limits raises uncertainty over the outcome, providing a convincing instrument that allows us to estimate causal effects. We find that in the calendar year of a gubernatorial election that was decided by fewer than four points, state investment in the manufacturing sector is 25% lower than in years with no such close gubernatorial election.