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Congress is now considering new regulationson campaign finance. Although their goal of pre-venting corruption or its appearance is impor-tant, those restrictions may reduce the competi-tiveness of elections.Many states have enacted regulations on cam-paign finance, including limits on how much canbe given to political parties. A close analysis of those state limits shows that restrictions on howmuch parties can raise and contribute to theirnominees hinder the ability of candidates, espe-cially those in close races, to raise money. Suchrestrictions do not hurt incumbents as much asthey do challengers, since sitting lawmakers canattract more money from interest groups andindividual donors. State regulatory limits on par-ties reduce the vote totals of challengers, therebyreducing the competitiveness of elections.
The Effect of Campaign Finance Laws on Electoral Competition
 Evidence from the States
by Thad Kousser and Ray LaRaja
_____________________________________________________________________________________________________
Thad Kousser is a graduate student in political science at the University of California, Berkeley. Ray LaRaja is anassistant professor of political science at the University of Massachusetts, Amherst.
Executive Summary
No. 426February 14, 2002
 
Regulations on campaign finance, such asthose of the McCain-Feingold and Shays-Meehan bills now before Congress, seek to pre-vent corruption or the appearance of corruptionin the political process, but a consequence of such regulations may be a reduction in the com-petitiveness of elections. This analysis looks atthe effects of campaign finance regulations onthe competitiveness of state elections.
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Weaddress two central questions: First, whatimpact do campaign finance laws have on theflow of political money to campaigns? Second,what is the impact of that money on electionoutcomes?Recent studies in political science suggestthat weakening the role of parties in cam-paigns might undermine electoral competi-tion. While interest groups and individualdonors tend to favor incumbents, parties givemore than expected to challengers becausethey want to maximize their share of seats ina legislature.
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Pursuing that goal efficientlyleads parties to contribute to challengers incompetitive districts if the challengers have achance of winning.
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Interest groups, in con-trast, often seek influence over policythrough lobbying legislators; accordingly,they prefer to give money to incumbents whowill likely win and return to the legislature.These findings suggest that if parties areconstrained in how much they can raise orspend, serious challengers will be penalizedthe most. Some studies of congressional elec-tions
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indicate that any loss of campaignfunds will hit challengers especially hard atthe polls, compounding the problems causedby limits on party contributions.There is no single system of political regu-lation in state legislative elections. Forinstance, 24 states impose limits on howmuch money individuals can contribute toparty organizations, and 23 set caps on partycontributions to campaigns. We use a broad-ly representative sample of 15 states
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to showhow different campaign finance laws caninfluence which candidates raise money andwho wins votes. This approach allows us toexamine how the variation in state campaignfinance laws affects political competition.We begin by describing the various limitson political contributions in effect at thestate level during the 1996 elections and link-ing them to overall patterns in fundraising.Taking account of other relevant factors, wethen analyze the effects of laws on how muchmoney individual candidates in contesteddistricts raised. The second stage of the studyfocuses on districts where an incumbent ran,gauging the impact of campaign dollars onthe vote totals garnered by both incumbentsand challengers.We find that limits on how much partiescan raise and contribute to their nomineeshinder the ability of candidates, especiallythose in close races, to raise money.Moreover, those limits do not penalizeincumbents as harshly as they do challengers,since sitting lawmakers can attract moremoney from interest groups and individualdonors. Most critically, these fundraisingobstacles, which can be attributed to regula-tory limits on party activity, reduce chal-lengers’ vote totals.
Campaign FinanceRegulations in the States
One way American states set the rules of the electoral game is by enacting fundraisinglaws. A state can choose any combination of the following:
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a limit on party donations to candi-dates,
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a limit on contributions to parties,
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a limit on interest group
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donations tocandidates, and
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a limit on individual donations to can-didates.To evaluate the effects of those regula-tions, we assembled data on campaign con-tributions, campaign finance laws, and elec-toral conditions.
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We then divided the contri-bution data into three categories that closely(but not perfectly) parallel the targets of cam-paign contribution limits:
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Regulations oncampaign financeseek to preventcorruption or theappearance of corruption in thepolitical process,but a conse-quence of suchregulations maybe a reduction inthe competitive-ness of elections.
 
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party contributions: donations fromtraditional party committees, andmoney provided by caucuses;
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•
interest group contributions: interestgroup money and donations from“interested individuals,” that is, indi-viduals who have been identified asbelonging to particular organizationsor occupational categories;
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and
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small individual contributions: individ-uals who give too little to be required tolist their names and occupations.To control for the size of legislative dis-tricts and make comparisons across thestates possible, we transformed contribu-tions into dollars per thousand residents ineach legislative district.
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We selected the 15states listed in Table 1 because they displaywide variation in campaign finance laws (theexplanatory factors of interest in this study).Table 1 provides an overview of regulationsand elections in the sampled states. The orga-nization of Table 1 reflects the degree of reg-ulation, from least restrictive to most restric-tive, with loosely regulated states at the top.The aggregate figures show that campaignfinance laws affect the source of a candidate’sfunding. In states with loose regulations onpolitical contributions (Colorado, Idaho,Illinois, and Utah), parties provide candidateswith an overall average of 23 percent of theirfunds while interest groups and affiliatedindividuals provide 67 percent of funds(Figure 1). In contrast, in states with limits onall kinds of contributions (Kansas, Kentucky,Ohio, and Wyoming), parties provide only 15percent of candidates’ funds, and interestgroups and affiliated individuals provide 76percent (Figure 2).Even though the playing field may appearleveled by laws constraining all types of donors, parties and the types of candidatesthat parties back (i.e., challengers) suffer themost from limits. This difference may appearmarginal. However, in a state in which very fewdistricts are competitive, this small differencein party control of funds might make a big dif-ference in races that are potentially close.
Estimating the Effects of Contribution Limits
We need not be content with these aggre-gate numbers. We also examined the impactof contribution limits on challengers andincumbents in different types of races. Weanalyzed donations to 2,234 candidates,
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allof whom ran for contested seats in the leg-islative houses listed in Table 1 during1996.
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Using measures of the electoral con-ditions in each district, we estimated econo-metric models that explain the variation inhow much a candidate raised from partydonors, interest groups, and individuals.To predict contribution subtotals, we useda number of explanatory factors. Reports bythe Federal Election Commission
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and theCouncil of State Governments
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list the con-tribution limits enacted in each state.
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To esti-mate the expected tightness of races we lookedat past party performance (during the 1992and 1994 races) in legislative districts.
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Wecomputed the average spread between themajor parties in contested races and subtract-ed that value from the major party vote tomeasure the tightness of races. We also used aparty’s history in the district to estimate a can-didate’s probability of winning, reporting theproportion of the two-party vote that the can-didate’s party had won in elections since the1990 redistricting.
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We identified incum-bents by comparing prior session legislativerosters
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with ballot choices and then recordedhow each candidate fared in 1996.
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Finally, wecontrolled for the legislative chamber in eachrace, the percentage of contested races for thechamber, district size, the candidate’s party,and whether or not the candidate held a lead-ership post within the legislature.With these factors measured, we then esti-mated multivariate regressions designed to iso-late the effect of each variable, holding all oth-ers constant. The results show that the generallessons from the political science literature holdin state elections. Table 2 gives the results of onemodel that predicts how much candidatesraised from parties and party caucuses.
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Parties and chal-lengers suffer themost from limits.
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