Working Paper of the Day- Inefficient Lobbying, Populism and Oligarchy

Inefficient Lobbying, Populism and Oligarchy by Francisco H.G. Ferreira and Filipe R. Campante;

"This paper analyses the efficiency consequences of lobbying in a production economy with imperfect commitment. We first show that the Pareto efficiency result found for truthful equilibria of common agency games in static exchange economies no longer holds under these more general conditions. We construct a model of pressure groups where the set of efficient truthful common-agency equilibria has measure zero. Second, we show that under fairly general assumptions, the equilibrium will be biased against the group with the highest productivity of private capital, reflecting the fact that, on the margin, less productive groups find lobbying relatively more rewarding. Finally, as an application, if lobbies representing “the poor” and “the rich” have identical organizational capacities, we show that the equilibrium is biased towards the poor, who have a comparative advantage in politics, rather than in production. If the pressure groups differ in their organizational capacity, both pro-rich (oligarchic) and pro-poor (populist) equilibria may arise, all of which are inefficient with respect to the constrained optimum."

World Bank summarizes the research;

"In fact, a central result in the economics literature on lobbying is precisely that, under a set of assumptions about how lobbying takes place, the outcome is Pareto efficient.1 In other words: lobbying may redistribute resources among agents in society, but it does not cause any aggregate losses to society. While very influential, this result has also met with considerable surprise. After all, the common perception is that lobbying is a more distortionary form of political action than voting, and electoral outcomes have been shown to be generally prone to inefficiency.

Against this background, Campante and Ferreira’s “Inefficient Lobbying, Populism and Oligarchy” makes three contributions. First the paper shows that the Pareto efficiency of truthful equilibria in lobbying games only applies to a production economy if there are perfect commitment mechanisms. If capital markets are imperfect or if contract enforcement problems exist, then lobbying will, in general, lead to an inefficient allocation of resources.

The intuition is simple: in a truthful equilibrium, private agents offer contributions that transfer back to the government agent the full value of the policy actions they are lobbying for. This enables the government to appropriate the full surplus generated by policy. It therefore chooses the policy which maximizes social surplus. But this requires that private groups are able (in addition to willing) to transfer the full surplus. What if they are credit constrained, and can only make the transfer after production takes place? If a set of agents can not credibly commit to contributions that exhaust their gains from a particular policy, the government no longer has an incentive to maximize the full surplus, and the Pareto efficiency result breaks down."

Related;
Acemoglu, Daron; Phillippe Aghion and Fabrizio Zilibotti (2006): “Distance to Frontier, Selection and Economic Growth”,

Bernheim, Douglas and Michael Whinston (1986): “Menu Auctions, Resource Allocation, and Economic Influence”, Quarterly Journal of Economics, CI (1), 1-31.

Dixit, Avinash; Gene Grossman and Elhanan Helpman (1997): “Common Agency and Coordination: General Theory and Application to Government Policy Making”

Esteban, Joan Maria and Debraj Ray (2006): “Inequality, Lobbying and Resource Allocation”