Advanced Political Economics Lobbying Advanced Political Economics Fall 2011 Riccardo Puglisi

Lobbying Some policy decisions create concentrated benefits for a small number of well-defined individuals, while costs are diffused in the society at large. EXAMPLES: local public good, trade policy, regulations LOBBYING: a model of the political process, whereas some groups have more power than what is implied by the number of votes they control.

Local Public Good A locally provided public good: bridge, local redistribution, … CONSIDER: 3 groups (defined by preferences, occupation, wage, geographical location) POLITICAL PROCESS: Social optimum Public goods are determined locally Finance of public goods is determined centrally [soft budget constraint] Lobbying

Simple Model with equal income y >1 relative weights 3 groups of individuals {1,2,3} with equal income y >1 relative weights 3 local public goods only benefits group i and is provided in equal per capita amounts preferences for group i: where Ci is private consumption in group I (Note: we use quasi-linear preferences)

Social Optimum A utilitarian social planner maximizes: The resource constraint can be written as:

Social Optimum The social planner chooses to maximizes: Every group receives the same amount of the local public good:

Locally Determined Public Good Each group i may choose to tax its member, , to provide the local public good : Budget constraint Public good provision Utility to be maximized w.r.t. Same result as social optimum Aggregate spending

Centrally Financed Public Good Each group i chooses its local public good: The common tax rate financing these local public goods is residually determined SOFT budget constraint [Ex: health care system in Italy] AGGREGATE budget constraint: INDIVIDUAL budget constraint:

Centrally Financed Public Good Utility to be maximized w.r.t. : More spending than optimal. Why? Individuals do not fully internalize the cost of the public good Small groups spend more , since they internalize even less

Centrally Financed Public Good Aggregate spending: IDEA: Concentration of benefits and dispersion of costs lead to OVERSPENDING

Lobbying Lobbying may magnify this problem, as small groups might put “pressure” on politicians IDEA: An otherwise benevolent social planner may modify her policy decision due to the influence by the lobbies

Lobbying Group 1 forms a lobby, whereas Groups 2 and 3 do not. A lobby will take action to obtain a favorable public good allocation OPEN ISSUES: Which group is more likely to form a lobby? How to solve the free-riding problem?

4. A Model of Lobbying The lobby chooses a contribution to the politicians, which depends on the policy outcome: Proposed contribution: (Truthfulness of contribution schedule: Bernheim and Whinston 1986, Grossman and Helpman 1994) Utility for the lobby: (b1 is a constant which represents the reservation utility of the lobby)

4. Lobbying: Modeling the Government The government cares about Social welfare Contribution from lobbies Why? Campaign financing or direct transfers Government objective function:

4. Lobbying: Individual Utility AGGREGATE budget constraint INDIVIDUAL budget constraint Group 1 utility:

4. Lobbying: Government Decision The government chooses to maximize: Note: Compare the marginal benefit of increasing g1 with the MB of increasing g2 and g3

4. Lobbying: Government Decision

4. Lobbying: Results The equilibrium policy with lobbying is NOT efficient: Lobbying groups receive too much public good: non-lobbying groups too little Public consumption is mis-allocated No presumption of aggregate overprovision

4. Lobbying: Discussion Lobbying groups face a free-riding problem: if other members of the group lobby contribute for me, why bother? EX: Decrease in union density (but not coverage) How to enforce lobbying by reducing free-riding? Which groups are more likely to lobby? less free-riding more concentration of benefits A good model for targeted redistribution

4. Lobbying: Campaign contributions Lobbying: not only ex post pressure on politicians, but also (ex ante) contributions to candidates during political campaigns. Everywhere there are limits to individual contributions, including the US. Generally there are also limits to amount spent by politicians, but not in the US. Supreme Court decision: it would be a limitation to political speech (Buckley v. Valeo) Campaign contributions might be informative about quality of candidates. Replacement of private campaign finance with public funds would not help if political advertising is not directly informative. Put in other terms: if solely the equilibrium pattern of contributions is informative about quality of candidates (e.g. more is given to better candidates), then there is an informational benefit stemming from private campaign finance. This must be compared with its policy cost (equilibrium policy is closer to the one preferred by lobbies)

4. Lobbying: Informative contributions Informational benefits of private campaign finance Prat, Puglisi and Snyder (QJPS 2010): an empirical paper on whether the amount and pattern of campaign contributions help predict the effectiveness of legislators in North Carolina. Why North Carolina? The best (survey-based) measure of legislator effectiveness for its Assembly. Result (i): Controlling for observable individual factors, total amount of contributions received by incumbent candidates is a positive and significant (but weak) predictor of their effectiveness as legislators. Result (ii): [big money vs. small money] When distinguishing according to contribution size, total amount of small contributions (<2000$) is a positive and strong predictor of quality, while large contributions are a negative predictor. Result (iii): [organizations vs. parties] Contributions from organizations are a positive and strong predictor of quality, while contributions from parties are a negative predictor. So: Limiting large contributions appears to be beneficial from an informational viewpoint, but maybe the best policy is one of transparency regarding the source of funding for candidates.