Influence Activities, Coalitions, and Uniform Policies: Implications for the Regulation of Financial Institutions

Abstract

We examine a setting in which agents can form lobbying coalitions to influence a policy maker. Policy uniformity causes agents to free ride on each other’s lobbying and gives them an incentive to form lobbying coalitions. We investigate when coalitions are formed by similar or dissimilar agents and show that endogenous coalition formation causes the effects of policy uniformity and lobbying costs on aggregate lobbying activity and policy strength to be nonmonotonic. Our model suggests that increased competition in the market for coalition-facilitating lobbyists can lead to less lobbying. We discuss implications for the regulation of financial institutions. This paper was accepted by Shiva Rajgopal, accounting.