Adapted from “Elite Conflict and Industry Regulation: How Political Polarization Affects Local Restrictions and State Preemption of the U.S. Hydraulic Fracturing Industry” by Lori Yue from Columbia Business School and Yuni Wen from the University of Oxford Said Business School.
Key Takeaways:
- When authority overlaps across levels of government and regulatory agencies, firms and industries can leverage these partisan divisions between political elites to lobby to shape regulations to their advantage.
- Politicized firms face explicit risks because they are likely to face more pushback from stakeholders that do not share their sociopolitical view. But they can also find unique opportunities by obtaining support from others that agree with their values.
- The fracking industry is impacted by the so-called Red State, Blue City phenomenon: They face more bans from liberal cities, but they also find allies from the conservative state government to help them counteract local bans.
Why the research was done: Some businesses are inevitably politicized, whether because of their own business practices (like fracking or abortion care) or because of the political positions they take (like Hobby Lobby or Patagonia). But it has been unclear how this polarization impacts a business’s risks and opportunities.
Leveraging Richard Lachmann’s elite conflict theory — which argues that major structural changes occuring in society are triggered by conflict between elites rather than class struggle — Yue and her co-researcher decided to examine how the competing interests of political elites can impede or improve business opportunities in the fracking industry.
The hydraulic fracturing industry (otherwise known as fracking) is one such business. It is so polarized, in fact, that even though Vermont has no active oil wells, its state legislature explicitly banned the practice. “During politically sensitive time periods, the friction gets worse,” says Lori Yue, associate professor of business in the Management Division at Columbia Business School. Thus, she anticipated that the upcoming 2024 election would likely bring this issue to the political surface.
How it was done: Yue and her co-author reviewed publicly available data from Food & Water Watch and FracFocus to catalog all local fracking bans and lobbying efforts in the United States from 2001, the year fracking became widely adopted, to 2020, the most recent year data on fracking is available. They found that although counties that engage in fracking produce an average of $400 million in oil and gas per year, the industry also inspires immense backlash, with more than 500 bans across all 29 states that participate in fracking activities.
The researchers then mapped the bans and lobbying activities against both vertical and horizontal power structures: The vertical axis represented levels of government, including state and local political bodies, while the horizontal axis denoted their conservative or liberal political leanings.
Using that data, the researchers examined the impact of the Red State, Blue City phenomenon — how American politics has led to a form of geopolitical polarization in which state governments are controlled by more conservative elites while city governments are controlled by more liberal elites — and how Democratic city-level ordinances might be weakened or even nullified by state-level Republican efforts. “The question is, did companies leverage the conflict between local governments and the state’s regulatory authority?” Yue says.
What the researchers found: Yue found the polarization of political elites not only encourages the local government to impose bans on fracking; Republican allies on the state level also enable the industry to lobby the state government to try to preempt local bans.
As a result, political polarization creates both risks and opportunities in the industry. Specifically, the researchers found a causal relationship between urban-rural polarization and state-level efforts to preempt potential fracking bans on the local level. Because there is a concentration of Republican power on the state level, where the regulatory power is strongest, businesses are better enabled to lobby for preemptive regulations to circumvent local bans.
Why it matters: Yue’s analysis is a valuable testing ground for Lachmann’s theory of elite conflict, showing how political polarization affects business risk and opportunity. This research sheds light on businesses’ decisions about geography, providing a roadmap for understanding where business lobbying efforts in Republican-leaning state governments can mitigate local ordinances.
