A Theory of Small Campaign Contributions

About this event

Small donors are an important source of financing for political campaigns. Yet the literature focuses mainly on large donors and an influence motive. We propose a theory of consumption-motivated small donors with a key novelty: it centers on the interactions between small donors and the candidates' fund-raising strategy. We find that, through the candidates' actions, consumption-motivated small donors end up contributing more in close races, and to the campaign of the underdog. The candidates' actions also amplify the effects of donors' income on contributions. These patterns find support in the empirical literature. We then assess the impact of standard tools of campaign regulation: caps on individual contributions and on total spending. We find that, due to equilibrium effects, those tools may produce outcomes opposite to intended objectives. Finally, we identify a tax-and-subsidy scheme that mutes the effect of income while still allowing donors to voice the intensity of their support.