Debt and Incentives in Political Campaigns

Debt is a significant source of funding of political campaigns. In this paper, we explore the nature and the implications of debt financing of political campaigns. We show that indebted politicians raise more funds, especially from special interest groups in subsequent election cycles. Importantly, our evidence is consistent with the view that indebted politicians trade political favors in return for additional campaign funds from special interest groups. The results show that debt distorts political decision making by forcing indebted politicians to cater to contributors’ demands.