In order to decompose the eects of the extensive margin and the intensive margin of lobbying, I propose another counterfactual. Because the credit shock induces an increase in lobbying at the intensive margin as a result of the decline in the interest rate and the subsequent increase in the demand for capital, to study the contribution of this change in lobbying intensity on misallocation I propose a counterfactual where I keep the level of lobbying constant at the initial steady state values. In other words, I allow rms to lobby for capital tax benets, but I prevent them from reacting to the new environment by changing the level of lobbying. What the model captures with this exercise is the increase in misallocation that results only from the increase in the fraction of lobbying rms. As we can see in gure (14), the eects are almost identical to the case where we do not have lobbying. Even though the fraction of lobbying rms increases and the dispersion of the marginal product of capital increases as a result of more rms doing lobbying, the eects on TFP and output are negligible. This result suggests that almost all the increase in misallocation from the model with lobbying is generated by the intensive margin.

# 6.2.3 Testing Implications for Lobbying and Tax Rates

We have discussed the ability of the model to reproduce some of the most salient features of the U.S. credit crisis of 2007-2009, including the aggregate lobbying behavior in the economy. Here, I assess the performance of the calibrated model to match the empirical patterns documented in section (3).

# Changes of Eective Tax Rates

Using data from Compustat, Section (3) established that after the nancial crisis the eective tax rates paid by lobbying and non-lobbying rms declined sharply. In addition, consistent with the observed increase in lobbying activity for taxation, the decline is more drastic for lobbying rms.

Figure (16) compares the data and the model. For the model, I compute the eective tax rates for lobbying and non-lobbying public rms and I compute the cumulative change with respect to the value in 2007 for each case.<sup>51</sup> The data shows dierences with respect to the tax rate in 2007.

In the case of the eective tax rate of lobbying rms, the left panel of gure (16) shows that the model ts the general pattern of the average tax rate for lobbying rms after the credit shock. In particular, it captures 53 % of the decline in the eective tax rate by 2009. With the credit shock, lobbying rms start increasing their lobbying activity and as a result the amount of tax benets they are obtaining is bigger. In addition, the amount of capital these rms are using is also higher, which also reduces the eective tax rate. As a result, the tax rates for those rms start declining until 2009. After bottoming in that year, the model converges to the steady state faster than in the data. This is explained partly because the interest rate returns to the steady state level after that period, inducing a reduction of the capital demand for public rms and in lobbying eort. Following that retraction in capital and lobbying, the amount of tax benets goes down.

> 51In order to map the model to the data, I use the procedure described in section 5 to assign rms to the private and public groups.

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