The outcomes from this experiment follow from dierences at both the intensive and the extensive margins of production. At the intensive margin, incumbent rms are negatively aected due to the elimination of the lobbying activity that was used in the benchmark equilibrium by constrained and unconstrained rms. As I previously discussed, the capital stock in this economy declines due to the lower incentive to accumulate assets in order to exploit the tax benet schedule. The reduction in capital accumulation comes from three forces. Because lobbying generates an increase in the optimal size of rms, without this force rms reduce capital demand and therefore there has to be a downward adjustment in savings for these rms. Second, with lobbying, some rms accumulate wealth with the expectation that at some point they will be able to lobby. Abstracting from this activity removes this force and therefore there is a reduction in savings. Third, lobbying allows some nancially constrained rms to increase saving in order to overcome nancing constraints. Absent lobbying, those rms reduce their saving decisions and reduce capital accumulation.

In section (4.2) I discussed the implications of the tax benet schedule on misallocation and selection. Without lobbying, we see that TFP in the economy goes up, indicating some misallocation as a negative consequence of lobbying. This is reected in the decrease in the marginal product of capital in the counterfactual scenario.

At the extensive margin, there is a small increase in the number of rms in the economy, explained by the decline in wages and interest rate resulting from the reduction in inputs. However, this increase in new producers is counterbalanced with a decline of the average size of rms (measured using labor or capital, since both are complements) and in the capital to labor ratio of the economy as a whole and in both sectors.

Finally, lobbying seems to be welfare improving as suggested by the decrease in total consumption when we move from the benchmark economy to an economy without lobbying. Lobbying increases factor demands, drives up wages and prots that more than compensate the increase in savings. However, we need to be careful about this last statement, which only considers consumption levels between steady states. In order to consider the implications for welfare, we should also take into consideration the transition from one steady state to the other. I consider this in section (6.3.4).

# 6.3.3 Fiscal Reform: No Heterogeneity in Eective Tax Rates

The evidence shows that eective tax rates that public rms pay are lower than the 35 % that the law establishes. In addition, there is a lot of heterogeneity even within this set of wealthy and large producers. Since the government is losing a considerable amount of resources to this group of rms that could be used for health, social security or foster small business growth, lobbying policy is an issue of constant debate in the media and the policy arena.<sup>52</sup> Other arguments point to the `unfairness' of lower tax rates for big corporations and the distortions that tax breaks generate to the economy.

In order to contribute to this debate, the second experiment proposes to take out all the sources of

> 52See the report by the Goverment Accountability Oce (GAO 2013) or McIntyre et al. (2011) as examples in this debate.

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