# 1 Introduction

Understanding the factors that contribute to large declines in total factor productivity (TFP) during nancial crises is key for designing policies that lead to robust recoveries. A growing consensus among economists views resource allocation among rms as an important driver of TFP over time (Obereld (2013) and Gopinath et al. (2015)). During periods of nancial distress, nancial frictions can prevent productive rms from operating at the optimal scale leading to misallocation and lower TFP (Khan and Thomas (2013)). In this paper, I show that nancial frictions aect lobbying decisions that aim to extract tax benets, and that this channel is relevant to explaining the changes in TFP observed during nancial crises. I focus on tax benets associated to capital, since those are the most important ones in the tax code.<sup>1</sup> I make three contributions. First, I document the increase in lobbying activity intended to aect the tax code that occurred during the U.S. nancial crisis in 2007-2009.<sup>2</sup> Second, I contribute to the literature that studies the eects of nancial frictions on resource allocation and productivity uctuations over business cycles by quantifying a new channel lobbying that interacts with nancial frictions and changes the eects of that source of misallocation. Third, I conduct counterfactual experiments to study the long run implications of lobbying and scal reforms.

The main nding of the paper is that lobbying for capital tax benets amplies the misallocation that arises due to nancial frictions during a credit crunch. The interaction between lobbying and nancial frictions generates two opposing eects, one that increases misallocation and one that alleviates the distortions. In the calibrated economy, the rst eect dominates. Compared to an economy without lobbying, I nd that the lobbying economy amplies the distortions arising from nancial frictions, leading to a one-third larger decline in output.

Using data from Compustat that I match with rm-level lobbying expenditures from the Center for Responsive Politics (CRP), I document three novel facts on lobbying during a nancial crisis. First, aggregate lobbying expenditure increased during the crisis. Between 2007 and 2009, the deviation from a linear trend in aggregate lobbying expenditure increased by 15 percentage points. This captures changes in both the extensive (number of rms) and intensive (average expenditure) margins. Second, sectors that depend more on external nance (Rajan and Zingales (1998)), and therefore are more likely to be aected by the shock, drove the increase in lobbying activity. I show that the share of these sectors in total lobbying expenditure increased from 53% in 2007 to 63% by 2010. Third, I use a triple dierence approach that exploits variations in time (before and

> 1The U.S. government provides dierent types of tax breaks to corporations allowing them to reduce their tax burden. The literature has found that the tax code can be inuenced through lobbying. Since lobbying entails substantial xed costs, then large and capital intensive rms can target those benets to themselves. Special tax provisions for individual rms have been documented by Siegfried (1974), Barlett and Steele (1988) and McIntyre and Nguyen (2004). See Richter et al. (2009) and Arayavenchkit et al. (2014) for a discussion of dierent tax benets associated with capital and the endogeneity of the tax code.

> 2Throughout, I will refer to lobbying to aect the tax code and lobbying for capital tax benets simply as lobbying. In the lobbying data there are 77 issues that rms can choose to lobby for. The one that rms use to try to inuence the tax code is Taxation. This is the most important issue in terms of expenditure, and it is the one used in the empirical analysis.

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