Endogenous Lobby Research Articles

Examining the Impact of Electoral Competition and Endogenous Lobby Formation on Equilibrium Policy Platforms

Abstract This paper formulates a mathematical model that combines the dynamics of interest group formation with electoral politics, involving office-seeking and corrupt political candidates and voting population with well-defined policy as well as ideological preferences. The analysis provides several interesting insights into the factors affecting lobby membership, free-riding incentives of citizen-voters and aggregate monetary donations garnered by lobby groups. Besides this, the paper also explores the impact of the formation of distinct lobby groups, the presence of swing voters and the corrupt practices or financial embezzlement on the equilibrium policy choice of electoral contenders. The findings reveal that more honest spending of campaign donations by electoral contenders reduces both the size of the lobby (or membership) as well as aggregate campaign contributions in equilibrium. In contrast, a rise in the fixed cost of organization is found to augment lobby membership along with the total amount of campaign contributions. In addition, a reduction in the level of electoral uncertainty as well as a rise in the ideological or swing voter density is found to increase the effectiveness of campaign contributions in raising an electoral candidate’s perceived popularity and, therefore, a smaller lobby group with lower aggregate donations is deemed as sufficient in influencing electoral outcomes. Moreover, the results indicate that a lower utility difference derived by the citizen-voters when comparing the two electoral candidate’s policy choices translates into smaller dispersion of the voters’ ideological bias, and consequently results in an increase in the size of lobby groups and their corresponding aggregate donations. As regards the choice of equilibrium policy, evidence of full policy convergence is not found in the case when citizen-voters of the two groups have separable preferences. In addition, policy equilibrium for a more realistic case in which the two policy platforms exhibit strategic interaction by reacting to each other has also been estimated with the help of simulations. Finally, this paper helps in categorically deciphering the influence of the median voter effect (or the centripetal force) and the distinct centrifugal forces in the form of lobbying effect, swing voter effect and the financial embezzlement effect on the equilibrium policy choice by employing different parametric specifications of the model.

Influence Activities, Coalitions, and Uniform Policies

This paper examines the effects of endogenous coalition formation in a setting where agents lobby a policy-maker. Our motivating example is of insiders lobbying for weaker regulation to allow for privately beneficial but socially-wasteful diversion. Policy uniformity (e.g., one-size-fits-all rules) cause agents to free ride on each other's lobbying and gives them an incentive to form lobbying coalitions, i.e., lobbies. We show that the coalition formation mechanism influences whether lobbies are formed by similar or dissimilar agents. Additionally, endogenous lobby formation causes the effects of policy uniformity and lobbying costs on aggregate lobbying activity and policy strength to be non-monotonic.

The Effects of Firms' Lobbying on Resource Misallocation

We study the causal effect of firms’ lobbying activities on the misallocation of resources through the distortion of firm size. To address the endogeneity between firms’ lobbying expenditure and their size, we propose a new instrument. Specifically, we measure firms’ political connections based on the geographic proximity between their headquarter locations and politicians’ districts in the U.S., and trace the value of these networks over time by exploiting politicians’ assignment to congressional committees. We find that a 10 percent increase in lobbying expenditure leads to a 3 percent gain in revenue. To investigate the macroeconomic consequences of these effects, we develop a heterogeneous firm-level model with endogenous lobbying. Using a novel dataset that we construct, we document new stylized facts about lobbying behavior and use them, including the one from the instrument, to estimate the model. Our counterfactual analysis shows that the return to firms’ lobbying activities amounts to a 22 percent decrease in aggregate productivity in the U.S.

Endogenous Protectionism and Tariffication: Implications of the Interest Group Size and Free-Rider Problem

We endogenize bargaining power between the industry and the government to characterize an endogenous lobby formation and a general form of a protective import tariff in an asymmetric oligopoly. We show that the free-rider problem inevitably emerges in the market. The problem of free riding in the game, if serious, will lower the lobbying-endogenous tariff, with the rate subsequently approaching the welfare-maximizing level. Furthermore, an increase in the lobbying-endogenous tariff decreases social welfare in the game. Notably, welfare-improving trade liberalization occurs if the government removes the lobbying-endogenous tariff and moves toward free trade.

Protection for Sale: The case of oligopolistic competition and interdependent sectors

AbstractIn Grossman‐Helpman's (1994) canonical “Protection for Sale” (PFS) model, political competition among industry lobbies is driven purely by their interests as consumers. This paper introduces demand linkages and oligopolistic competition into the PFS framework to address the rivalry among lobbies stemming from product substitutability. It shows that increased substitutability weakens the interest groups' incentives to lobby and reduces tariff distortions. This may explain why empirical tests of PFS find surprisingly little impact of lobbies on the government's trade policy decision. The paper also analyzes endogenous lobby formation, suggesting that demand linkages may adversely affect the industry decision to organize.

Endogenous Lobby Formation and Endogenous Environmental Protection with Unilateral Tariff Reduction

This paper studies how one country’s decision to liberalize trade affects the political economic structure that determines environmental policy in another country. By constructing a political economy model in which the formation of lobby groups and environmental policy are endogenously determined, we show that unilateral tariff reductions by a large country importing a polluting good will generate a lobby group with a relatively lower cost of organization in a small country exporting that good. A formulated lobby demands an inefficient environmental policy, and hence, the small country’s environmental regulations become less efficient. Then, we show that when a lobby already exists, unilateral tariff reductions result in the formation of a rival lobby and consequently make the small country’s environmental policy more efficient.

Endogenous Lobbying and Protection under Monopolistic Competition

This paper studies the “Protection for Sale” model in the setting of monopolistic competition drawing on the quadratic sub-utility model. This model generates two new findings: (1) the average cross-price elasticity, in particular, only among foreign varieties in a sector negatively influences the level of protection; (2) the total number of domestic varieties over one of the foreign varieties in a sector, a new proxy for political power of domestic lobby groups in that sector, positively influences the level of protection.

Lobbying for Education in a Two-Sector Model

Modern economies devote a relevant share of their resources to education. However, even among industrialised countries, there are dio€€žerences in the traits of the education system and in its outcome in terms of human capital composition. The question we pose in this paper is why the composition of human capital is so diversified. The answer we propose is that the education system responds to the economy’’s structure of production. Skills are required by firms according to their needs and are supplied through the education system. We analyse the political economy of education in a two-period model in which heterogeneous firms, specialised in two dio€€žerent sectors, try to induce the government to finance the type of education which is complementary to their production. In the first period, the policy-maker decides the skill composition of new-workers which will determine the supply of skills in the second period. Firms may lobby to obtain their preferred skill composition. We show that in the political equilibr um in which firms in both sectors get organised, the policy-maker chooses the same skill composition that would be chosen by the social planner. Moving to endogenous lobbying, we are able to show that, if there are no costs of lobbying, then both sectors will lobby in equilibrium. However, in the more realistic case in which if lobbying is costly it may be that only one sector will find it profitable to offer monetary contribution; which sector gets organised depends on sectors’’ share in total output, relative productivity and prices of the two sectors.

Does Centralization Affect the Number and Size of Lobbies?

AbstractPrevious research has shown that the effect of fiscal centralization is to reduce lobbying. However empirical evidence suggests that this is not always the case. This paper attempts to explain the empirical evidence in a two‐jurisdiction political economy model of endogenous lobby formation and policy determination. We measure lobbying in two ways: (i) the number of lobbies formed under the two settings and (ii) their impact on policy decisions. We show that, contrary to the predictions of the preference dilution effect, the effect of centralization on lobbying are ambiguous with respect to both measures of lobbies.

Lobbying and Contract Delegation in Public Procurement

Abstract Interest groups exert influence on legislators' decisions about how to organize the contracting process in public procurement. Traditionally, centralized contracting structures have been favored to avoid allocative inefficiency. However, legislators have recently started to allow more and more contract delegation in public procurement projects. Different interest groups argue in favor and against this tendency. The objective of this paper is to judge from a normative perspective what socially efficient contracting structures are and from a positive perspective what contracting structure we can expect to find as equilibria of an endogenous lobby formation game. From the normative perspective, it is shown that both contracting structures can be socially efficient. Furthermore, the conditions under which a certain contracting structure is socially superior are identified. From the positive perspective the main result shows that we can have equilibria of the lobby formation game with socially efficient contracting structures and with socially inefficient contracting structures. Again, the circumstances under which the different equilibria occur are identified.

Contributing or Free-Riding? A Theory of Endogenous Lobby Formation

We consider a two-stage public goods provision game. In the first stage, players simultaneously decide if they join a contribution group. Then in the second stage, players in the contribution group simultaneously offer contribution schedules to influence the government’s decision on the public good provision. Using perfectly coalition-proof Nash equilibrium (Bernheim, Peleg and Whinston, 1987 JET), we show that the set of equilibrium outcomes is equivalent to an “intuitive hybrid solution concept, the freeriding-proof core, which is always nonempty but does not necessarily achieve global efficiency. It is not necessarily true that an equilibrium contribution group is formed by the players with the highest willingness-to-pay, nor is it true that group members are consecutive with respect to their willingness-to-pay. We also show that the equilibrium level of public good shrinks to zero as the economy is replicated in a certain way.

If You Cannot Get Your Friends Elected, Lobby Your Enemies

We incorporate campaign contributions in the citizen-candidate model of representative democracy with endogenous lobbying of Felli and Merlo (2006). In equilibrium, lobbies contribute to the electoral campaign of candidates whose policy preferences are aligned with their own. In the event that their preferred candidate does not win the election, lobbies also transfer resources to elected politicians with opposed preferences to induce policy compromise. On the other hand, lobbies never make post electoral transfers to winning candidates whose electoral campaign they supported.

Market Conduct and Endogenous Lobbying: Evidence from the U.S. Mobile Telecommunications Industry

This paper empirically explores the relationship between firms' market behavior and their lobbying activities in a regulated market. In particular, we investigate whether the amount of contributions offered by cellular service providers to fund the campaigns of political parties affected market conduct in the early US mobile telecommunications industry. We structurally estimate market interactions while taking the potential endogeneity of lobbying decisions into account. Our results show that competition was more intense in those states where campaign contributions by the cellular industry have been higher. Furthermore, we reject the hypothesis that lobbying activities can be regarded as exogenous in the study of market conduct.

Market Conduct and Endogenous Lobbying: Evidence from the U.S. Mobile Telecommunications Industry

This paper empirically explores the relationship between firms' market behavior and their lobbying activities in a regulated market. In particular, we investigate whether the amount of contributions offered by cellular service providers to fund the campaigns of political parties affected market conduct in the early US mobile telecommunications industry. We structurally estimate market interactions while taking the potential endogeneity of lobbying decisions into account. Our results show that competition was more intense in those states where campaign contributions by the cellular industry have been higher. Furthermore, we reject the hypothesis that lobbying activities can be regarded as exogenous in the study of market conduct.

SPECIAL INTERESTS AND THE GAINS FROM POLITICAL INTEGRATION

This paper presents a formal study of economic influence by special-interest groups under political integration and separation. We first show that countries where more groups are organized to lobby gain from political integration on economic grounds. The reason is that a more organized country, under a political union, can affect policies in the other country to its advantage, something that a less organized country can do to a lesser extent. We then study the interaction of political integration and endogenous lobbying structure. We show that political integration affects the formation of interest groups. Moreover, if a country is more organized before political integration, this will continue to be the case afterward.

Endogenous Lobbying

In this article, we present a citizen-candidate model of representative democracy with endogenous lobbying. We find that lobbying induces policy compromise and always affects equilibrium policy outcomes. In particular, even though the policy preferences of lobbies are relatively extreme, lobbying biases the outcome of the political process toward the center of the policy space, and extreme policies cannot emerge in equilibrium. Moreover, in equilibrium, not all lobbies participate in the policy-making process.

Endogenous Lobbying

In this article, we present a citizen-candidate model of representative democracy with endogenous lobbying. We find that lobbying induces policy compromise and always affects equilibrium policy outcomes. In particular, even though the policy preferences of lobbies are relatively extreme, lobbying biases the outcome of the political process toward the center of the policy space, and extreme policies cannot emerge in equilibrium. Moreover, in equilibrium, not all lobbies participate in the policy-making process.

Special Interest Politics and Endogenous Lobby Formation

We analyze endogenous lobby formation within a slightly modified version of the "special interest politics" model of Persson (1998). In our model the interest groups hold different fixed endowments of an "infrastructure good" which is a complement in consumption of the local public good. For any fixed set of organized groups the lobbying game is shown to have a unique equilibrium if the cost-elasticity of the supply of public good to the interest groups by the government is not too large. The groups which benefit from larger infrastructure endowments are then proved to be the ones which become organized while the others remain unorganized.

Resource rivalry and endogenous lobby

We present a two-sector model to depict the determination of trade preference. The model highlights lobby as a rivalry between sectors in competition for resources where the outcome of the lobby race is determined by each sector’s ability to generate rent at a given welfare cost to the general population. We investigate the relation between the structure of trade protection and the resource endowment.

Trade Liberalization and Industrial Concentration: Evidence from Brazil

This paper applies an endogenous lobby formation model to explain the extent of trade protection granted to Brazilian manufacturing industries during the 1988-1994 trade liberalization episode. Using a panel data set covering this period, we find that even in an environment in which a major regime shift has been introduced, more concentrated sectors have been able to obtain policy advantages, that lead to a reduction in international competition. The importance of industry structure appears to be substantial: In our baseline specification, an increase in concentration by 20% leads to an increase in protection by 5%-7%.