Lobbying and Interest Groups

Transcription

1 Lobbying and Interest Groups Rent-seeking Torun Dewan EC260, July 2007

2 Introduction Interest groups or associations are central to the political process A landed interest, a manufacturing interest,a mercantile interest, a moneyed interest, with many lesser interests, grow up of necessity in civilized nations, and divide them into different classes, accentuated by different sentiments and views. The regulation of these various and interfering interests form the principal task of modern legislation (Publius, Federalist Papers No 10). Yet standard Economic models assume benevolent policy maker who maximises social welfare - no role for organised interests Pluralist Political Science- benevolent view of interests t.dewan@lse.ac.uk 2

3 From Virginia to Chicago Modern Political Economy looks at the policy making process in terms of the strategic interaction between political decision-makers, voters and interests Within PE two schools of thought Virginia Political Economy or Public Choice: Focus on role of IG s in rent creation and competition for rents The Chicago School focus on role of IG s on political and legal mechanisms such as regulation t.dewan@lse.ac.uk 3

4 Introduction to Rent-seeking A rent is payment made for use of asset which does not transfer ownership. Monopoly Rent: Profits over and above that received in a competitive market Rent-seeking: Socially costly activity aimed at securing monopoly profit The existence of opportunity to obtain monopoly profits attracts resources into efforts to obtain rents Posner (1975) Any activity aimed at redistribution which takes up resources t.dewan@lse.ac.uk 4

5 Creating Rents In the Public Choice view rents are created as part of the political process. Examples include Property right over production of a public good. Protection for discriminating monopolist Natural Monopoly Regulation of Professions Imposition of trade restrictions Remember, it is not the rent per se, but how they are created which causes concern. t.dewan@lse.ac.uk 5

6 The Social Costs of Rent-Seeking. MC p m p R L MB q m q. t.dewan@lse.ac.uk 6

7 Types of rent-seeking behaviour Competition between firms for rent: Lobbying, Wining and Dining etc... Competition between government officials to secure access to bribes In this argument the bribe itself is not inefficient Bribes may even increase the quality of politicians Competition for access to bribes is costly to society due to opportunity cost Spillover effect If rent is lucrative attracts productive resources from other markets Similarly, politicians lobby to enter departments, committees where rentseeking occurs 7

8 Nothing Going On Except the Rent Consider Tullock s Taxi Driver example Drivers of taxis earn competitive market price Drivers set up interest group to lobby City Hall for a taxi license. License restricts access to the market Lower supply means drivers can secure rents Anticipation of rents under the license scheme leads to rent-seeking Rent-seeking incentive for Politicians City Hall sets up committee to oversee license distribution. Drivers lobby committee members for licences and bribes may be made Opportunity Cost: Politicians are less productive Spillover Effect: Legislators lobby to be put on committee. t.dewan@lse.ac.uk 8

9 Summary The rent-seeking literature provides us with a framework to evaluate the effect of interest group activity What are the costs to society? How are the effects of rent-seeking enhanced or mitigated by political institutions? t.dewan@lse.ac.uk 9

10 Estimating the Costs Krueger (1974) identifies a number of rent-seeking measures wrt import licensing in India. Where licenses awarded according to plant capacity construction of excess capacity Hiring unproductive help from families /friends for lobbying purposes Wasteful competition between government agencies to secure access to bribes Calculates loss due to rent-seeking for import licences the Indian economy as 7.3 percent of national income Equivalent loss due to rent-seeking in import licenses in Turkey at 15 percent GDP t.dewan@lse.ac.uk 10

11 The Tullock Paradox The problem which immediately concerns me is that the resources we can detect seem to be too small for their apparent value (Tullock) In the 99th congress 56 members of the House Ways and Means and Senate Finance Committees raised 26.5 million USD from interest groups The Tax Reform bill alone involved billions of dollars. Of course we need to focus on outlays Hazlett and Michael: In FCC cellular telephone bandwidth lotteries 38 percent of rents dissipated in expenses associated with applications. 11

12 The Tullock Paradox Two lobbies A and B invest x A and x B to secure a prize of unit value. Probability either wins the rent is proportional to investment probability A secures rent is investment). x α A x α A +xα B (where α is the rate of return on the We seek Nash equilibrium investments so that x A and x B are best responses to each other Formally u A (x A (x B)) u A (x A (x B )) and u B (x B (x A)) u B (x B (x A )) t.dewan@lse.ac.uk 12

13 The Tullock Paradox Suppose that α = 1 so that u(x A ) = x A x A + x B x A and u(x B ) = x B x B + x A x B First order conditions satisfy x B (x A + x B ) 2 1 = 0 and x A (x A + x B ) 2 1 = 0 Solution yields symmetrical bids x A = x B = 1 4 rent and thus dissipation of half the t.dewan@lse.ac.uk 13

14 The Tullock Paradox The problem has general solution solution x A = x B = α 4. For α = 0 no rent dissipation occurs. If α = 2 then each invests 1 2 and rents are dissipated. For α > 2 expected utility is negative. When this is so there is no pure strategy equilibrium. A mixed strategy equilibrium exists in which rents are fully dissipated. t.dewan@lse.ac.uk 14

15 Understanding the Paradox Consider the following scenario (Dal Bo, AJPS 2007)): You are one of three neighbours who own a piece of green land. Jointly you form a committee and decisions concerning the sale or management are made by majority rule. A real estate developer wishes to purchase the land for a small sum and build houses. You and your neighbours realise that selling at the low price is bad and yields a cost equal to θ > 0 to each of you. The developer makes you the following offer: he will reimburse you with θ + ε in the case where your vote determines the sale of the land in his favor, otherwise you get nothing. What should you do? t.dewan@lse.ac.uk 15

16 Bribing Voters Dal Bo extends this example to a game with a single principle and an N member committee. He finds Principal will induce the committee to vote yes at no cost Coalition of yes voters may consist of a simple majority + 1, a qualified majority, or all voters. Result breaks down however if the committee adopts unanimity Outcomes need not be efficient. t.dewan@lse.ac.uk 16

17 State Capture The previous example raises the possibility that the political process can be captured by interest groups despite (because of) democratic procedures. The Chicago School analyses the extent to which the state can be captured by interest groups Focus on interaction between political, economic and legal process through regulation, Politicians supply regulation but face counter-veiling pressures from producers and consumers acting as voters 17

18 State Capture Regulation is not about the public interest at all, but is a process, by which interest groups seek to promote their private interest... Over time, regulatory agencies come to be dominated by the industries regulated. (Posner) As a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit (Stigler) t.dewan@lse.ac.uk 18

19 Peltzman Regulatory Model (Mueller pp 344) Consider a politician who can regulate the price of an industry. Her utility is represented by V (U P, U C ) V is number of votes, U P is the utility of producers and U C that of consumers V is increasing in both of its arguments Now consider the effect of the price on U P and U C. Producers benefit from an increase in p since rents are higher U P = R(p) where R captures the positive effect of p Consumers face a utility loss from higher rents U C = K R(p) L(p) where L is the deadweight loss. t.dewan@lse.ac.uk 19

20 Peltzman Higher p may yield higher campaign contributions from producers and higher votes, but may cost votes from consumers The politician chooses p which solves dv dp = V dr } U {{ P dp } state capture V dr U C dp V dl }{{ U C dp } counter-veiling effect = 0 First term, positive marginal effect of p on V through U P Second term negative marginal effect of p on V through U C p also has an effect on L Intermediate price represents where an oligopolist would price Supply of regulation/de-regulation is higher in monopoly/perfect competition t.dewan@lse.ac.uk 20

21 State Capture Graphic p. MC p m p r = MaxV p c MB. q m q r q c q t.dewan@lse.ac.uk 21

22 Implications State Capture may be complete or incomplete Opportunities for rent-seeking are greater where relationship between money and votes are stronger 22

23 Legislation for Sale In the economic theory of the legislative process, legislation has a value and hence can be bought and sold like any other valuable commodity In the economists version of the interest group theory of government, legislation is supplied to groups or coalitions that outbid rival seekers of favourable legislation. The price that the winning winning group bids is determined by both the value of legislative protection to the group s members and the group s ability to overcome the free-rider problems that plague coalitions. Payments take the form of campaign contributions, votes, implicit promises of future favours and sometimes outright bribes. In short legislation is sold by the legislature and bought by the beneficiaries of legislation Landes and Posner (1975) t.dewan@lse.ac.uk 23

24 Legislation for Sale Problem due to dynamic nature of politics Deals struck today may be overturned tomorrow; thus uncertainty over the future drives down price of legislation Institutional mechanisms such as committee systems with seniority increase policy durability Problem due to legal impediments to the enforcement of deals A judiciary subservient to a current legislature can nullify legislation enacted in a previous session of legislature by refusing to enforce it According to Landes and Posner (1975) an independent judiciary increases policy durability (hence price). t.dewan@lse.ac.uk 24

25 Judicial Independence: Landes and Posner D 3 D 2 P rice D 1.. S 2... S 1 L 1 L 2 L 3 Legislation. d 1 t.dewan@lse.ac.uk 25