We test the political cost hypothesis using local soldier fatalities as a source of as-if-random variation in the threat of political costs for local defense firms. Soldier fatalities vary the threat of political costs for defense firms because the U.S. tradition of shared sacrifice during war vulgarizes war profits amid dead soldiers. Local defense firms record more income-decreasing accruals, equal to 1.17 percent of total assets, in response to a one standard deviation increase in local soldier fatalities (an additional 29 soldier fatalities in the average state-year). A wide variety of robustness tests corroborate our inferences.

We find that federal bureaucrats award more, larger, and less risky contracts to politically connected firms when they have greater discretion over contracting outcomes. Using a sample of 4.3 million federal government contract actions obligating $2.47 trillion between 2000 and 2015, we show that this result varies predictably across contract and agency characteristics, over time, and in placebo tests, and is robust to a comprehensive fixed effect structure and seven alternate measures of political connectedness. Our evidence illustrates the overlooked role of the bureaucrat in facilitating political bias in federal contracting outcomes.

This study examines the relation between taxes and business investment using the setting of an unexpected and economically significant federal corporate income tax rate increase in Canada known colloquially as the Halloween Massacre of 2006. This tax increase only applies to firms organized as income trusts, but not corporations. Using a difference‐in‐differences design, we find that investment by income trusts decreases about 0.67% for each 1 percentage point increase in the tax rate, translating into over $10 billion in reduced aggregate investment. In decomposing total investment, our results reveal that capital expenditures exhibit an immediate decrease while there is a delayed decrease in acquisition activity. Our results are concentrated in high‐investment income trusts that are most sensitive to the link between investment and taxes. Our study helps resolve conflicting prior results by providing robust evidence that tax increases have an economically significant and negative causal effect on business investment.