The study examines whether businesses in concentrated and/or highly regulated industries are more likely to make large campaign contributions in the attempt to reduce tax rates and increase retained earnings. While a number of studies have explored business-government relations, direct empirical explorations of the problem reported conflicting results. The diversity of results coupled with various explanations about the extent of business influence on public policy calls not only for further research, but also the use of alternative methodologies.

To this end, this study proposes a dual analytical framework based on contemporary theories of business power and political influence. The study tests the theories by using Tobit and simultaneous equation models on firms in manufacturing industries for the period 1977-1988 and 1977-1990, respectively. The latter model is decomposed into a system of structural equations that describe the behavior of firms in their effort to achieve a policy outcome that is beneficial to their common interests.

Results of the study support most of the main tenets of models of political activism and political influence. As hypothesized, both employment and regulation had a positive and significant impact on campaign contributions. On the other hand, industrial concentration or "market power" had a negative impact on campaign contributions, even when firm resource is specifically examined.

The study results consistently show that the impact of concentration on a firm's political activism and/or influence depends on its joint association with other determinants of campaign contributions, or tax liability. In both models, we find that firms in concentrated industries are likely to seek political influence if they are affected by direct or exclusive government regulation. The implication of this result for public policy is obvious: in order to reduce rent-seeking waste, government intervention in the market place has to be lessened.

Examination of the political partisanship thesis also provides support for the hypothesis that the marginal tax rate will be higher for firms in states with Democratic administrations, all other things being equal. A further look at the range of marginal effects shows that for about 71.7 percent of the study sample, the effect of the Democratic administration dummy on tax liability is positive. This finding suggests that Democrats should reduce the corporate tax rate if they want to maintain business confidence.