Wall Street sign, with the New York Stock Exchange in the background. A new working paper studies the benefits to businesses of lobbying by looking at the participation of financial institutions in the rulemaking process after the enactment of Dodd-Frank.

In a new working paper for the Washington Center for Equitable Growth’s Working Paper series, Equitable Growth grantee Daniel Carpenter and his co-author Brian Libgober at Harvard University seek to quantify the benefits to businesses of lobbying. Specifically, they examine the benefits of “lobbying with lawyers” via the participation of these businesses in the rulemaking process through commenting on regulatory agencies’ proposed rules.

The popular conception of lobbying usually focuses on the lawmaking stage in Congress, but an underappreciated but perhaps more influential stage is the rulemaking process. “Congressional statutes often leave to administrative agencies the essential tasks of specifying content or clarifying statutory meanings,” Carpenter and Libgober observe in their working paper, with one line of legislative text potentially becoming hundreds of pages of regulatory text.

This is where lobbying can turn into lawyering. Agencies are required by the Administrative Procedures Act to make a proposed rule publicly available for a set period of time so that anyone—whether a private citizen or the representative of a firm—can make comments on it. Agencies then review and incorporate those comments as part of its final rulemaking process.

So, what actually are the benefits to firms of participating in this rulemaking process? And is it actually different than if they didn’t participate in the rulemaking process at all? Looking at the participation of banks in the rulemaking process that followed the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Carpenter and Libgober estimate that banks that commented on the proposed rules had stock market returns of between $3.2 billion and $7 billion more than they would have had if they hadn’t participated.

They also did a deep-dive analysis of the Volcker Rule—a provision of Dodd-Frank that was particularly unpopular with banks because of its restrictions on proprietary trading and correspondingly engendered nearly 20,000 comments. The two authors found that the commenting process resulted in the share prices of the 30 firms whose comments were cited in the final rule outperforming the stocks of other banks by 8.2 percent in the first hour of trading after the announcement of the final rule.

The two researchers note that there are some limitations to the conclusions that can be drawn from this kind of analysis. Because they have to rely on publicly available data, for example, the authors could only analyze the returns to publicly traded companies engaged in the rulemaking process. And the 8.2 percent higher returns that those firms cited in the final Volcker Rule enjoyed in the first hour of trading are striking but not statistically significant.

As former Federal Reserve Chair Janet Yellen reminded us all in her final press conference as Fed chair, correlation is not causation. Rulemaking is complicated, there are many actors involved in it, and stock prices contain a lot of different types of information and expectations baked into them. It’s difficult to tease out any one comment or data point as the decisive factor influencing a final rule or stock price.

Notwithstanding those caveats, clearly firms think there is some financial benefit to them from participating in the rulemaking process, or they wouldn’t do it (or they’re not actually rational actors, but that’s a subject for another post). Furthermore, because large financial institutions have extensive resources to hire lawyers who are sophisticated and well-versed in the technical details of a policy, this raises the possibility that the rulemaking process is a channel via which certain actors are able to influence the final outcome of a law in a way that serves their own narrow interest, not the public interest.

Anyone can make a comment on a proposed rule, but it seems plausible that agencies will give more weight to those comments that demonstrate a deep understanding of the reality of how to implement a policy, especially in light of recent reports by The Wall Street Journal finding that thousands of the comments seemingly submitted by regular citizens on rules proposed by agencies as diverse as the Federal Communications Commission, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, and the U.S. Department of Labor, were fakes.

It is reasonable to assume, then, that differences in the size of resources for mobilizing and deploying legal expertise translate into differences in ability to influence policy. As Bloomberg columnist Matt Levine points out about The Wall Street Journal reports of fake comments, if the value of public comments on rules comes from their substance and compelling arguments, then “It gives more weight to the positions of ‘special interests’ with expertise than to those of regular citizens without it.”

If sunlight is the best disinfectant, then the public nature of the notice and comment part of the rulemaking process seems like an excellent requirement. But if meaningful participation in the rulemaking process favors the sophisticated over the unsophisticated, or, more precisely, favors those with the resources to hire the sophisticated, then the chances are high that regardless of the public nature of the agency rulemaking process, participation in it could be a channel via which economic power can be translated into political power. Even if the findings of this particular paper don’t lead to definitive conclusions about the influence of money and power on the rulemaking process, as Carpenter and Libgober point out, the empirical patterns found by it raise many interesting questions for social scientists to consider and analyze further.