A Theory of Small Campaign Contributions

Popular and academic discussions have mostly concentrated on large donors, even though small donors are a major source of financing for political campaigns. We propose a theory of small donors with a key novelty: it centers on the interactions between small donors and the parties’ fund-raising strategy. In equilibrium, parties microtarget donors with a higher contribution potential (i.e., richer and with more intense preferences) and increase their total fundraising effort in close races. The parties’ strategic fundraising amplifies the effect of income on contributions, and leads to closeness, underdog and bandwagon effects. We then study the welfare effects of a number of common campaign finance laws. 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.