Partisan Conflict and Private Investment


Abstract: American politics have been characterized by a high degree of partisan conflict in recent years. Combined with a divided government, this has led not only to significant Congressional gridlock, but also to spells of high fiscal policy uncertainty. The unusually slow recovery from the Great Recession during the same period suggests the possibility that the two phenomena may be related. In this paper, I investigate the hypothesis that political discord depresses private investment. To this end, I first present a reduced-form political economy model to illustrate how news about political disagreement affects investment through agents’ expectations. I then construct a novel high-frequency indicator of partisan conflict consistent with the model. The index, computed monthly between 1981 and 2015, uses a semantic search methodology to measure the frequency of newspaper articles reporting lawmakers’ disagreement about policy. Using a 2SLS approach, I estimate that a 10% increase in the partisan conflict index is associated with a 3.4% decline in aggregate private investment in the US.