Who Wants to Extend the Debt Ceiling? Members Who Stand to Lose Money in the Market

by John Sides on February 20, 2013 · 4 comments

in Legislative Politics,Political Economy

Does exposure to the stock market in legislators’ personal investment portfolios affect their vote choices? Do personal financial interests matter as much or more than the typical predictors of legislative decision-making such as party and constituency? I argue that legislator self-interest predicts more than just reelection-seeking behavior. Self-interest also suggests that legislators seek to maintain and protect their equity investments. I theorize that risk-averse legislators who have significant exposure to the stock market will make policy choices in order to avert market crashes and thus limit personal financial losses, and that legislators with little exposure to the market or who are risk accepting will not. Original data on the financial assets of members of Congress are collected and a novel measure of legislators’ revealed risk profiles is introduced. The empirical test is an examination of the eleventh-hour August 2011 U.S. House roll call to raise the U.S. debt limit. The findings show that risk-averse members of Congress with more money invested in the stock market were more likely to vote to increase the debt limit, presumably in order to avoid a market crash.

From a new working paper by Christian Grose.  The effects of equity investments on this roll call vote are not small:

If a legislator had $30,000 in stock investments and $30,000 in a retirement account, then there was a 59.8 percent chance of voting to extend the debt limit. If a legislator had $500,000 in stocks and $500,000 in retirement accounts, then there was a 66.4 percent chance of voting to extend the debt limit. If the legislator had $1.5 million in stocks and $1.5 million in retirement accounts, which is in the higher stratum of financial holdings, then there was a 78.3 percent likelihood of voting to increase the debt ceiling.

Find the paper here.

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