Should we tax or cap political contributions? A lobbying model with policy favors and access

This paper develops a model of political contributions in which a politician can either sell policy favors, or sell access. Access allows interest groups to share hard information with the politician in support of their preferred policy. Here selling access maximizes policy utility, while selling policy favors maximizes total contributions. Imposing a binding contribution limit makes it more likely that the politician sells access, which can improve expected constituent welfare. However, a contribution limit distorts the signals associated with the contributions, which tends to result in worse policy. Alternatively, a tax on political contributions can ensure that the politician sells access without distorting his information. Therefore, from the viewpoint of a representative constituent, a tax on contributions is strictly preferred to a contribution limit or no reform. The politician, however, may prefer regulation in the form of a contribution limit, even when a tax is better for the constituent.     

Political contribution caps and lobby formation: Theory and evidence

The perceived importance of “special interest group” money in election campaigns motivates widespread use of caps on allowable contributions. We present a bargaining model in which the effect of a cap that is not too stringent on the amount a lobby can contribute improves its bargaining position relative to the politician. It thus increases the payoff from lobbying, which will therefore increase the equilibrium number of lobbies when lobby formation is endogenous. Caps may then also increase aggregate contributions from lobbies and increase politically motivated government spending. We present empirical evidence from U.S. states that support various predictions of the model. We find a positive effect on the number of PACs formed from enacting laws constraining PAC contributions. Moreover, the estimated effect is non-linear, as predicted by the theoretical model. Very stringent caps reduce the number of PACs, but as the cap increases above a threshold level, the effect becomes positive. Contribution caps in the majority of U.S. states are above this threshold.     

Tying the politicians’ hands: The optimal limits to representative democracy

The citizen candidate models of democracy assume that politicians have their own preferences that are not fully revealed at the time of elections. We study the optimal delegation problem which arises between the median voter (the writer of the constitution) and the (future) incumbent politician under the assumption that not only the state of the world but also the politician's type (preferred policy) are the policy‐maker's private information. We show that it is optimal to tie the hands of the politician by imposing both a policy floor and a policy cap and delegating him/her the policy choice only in between the cap and the floor. The delegation interval is shown to be the smaller the greater is the uncertainty about the politician's type. These results are also applicable to settings outside the specific problem that our model addresses.     

Competing for Attention: Lobbying Time‐Constrained Politicians

We develop a model of lobbying in which a time and resource constrained policymaker first chooses which policy proposals to learn about, before choosing which to implement. The policymaker reviews the proposals of the interest groups who provide the highest contributions. We study how policy outcomes and contributions depend on policymaker constraints and the design of the “Contest for Attention.” Among other results, awarding attention to the highest contributors generally guarantees the first best policy outcome. It can also lead to the highest possible contributions, suggesting that a policymaker may not need to sacrifice policy in order to maximize contributions. Our results also give insight into other settings where agents compete for a decision maker's attention.     

Endogenous expropriation and political competition

We develop a game-theoretical model in which the politicians can be influenced by means of campaign contributions of special interest groups. If there is no legally binding contract, politicians have a proclivity to divert some contributions for private use. In doing so, they maximize their own utility which depends on expected election-winning premium and amount of funds misappropriated. We study the utility maximizing fraction of expropriation emerging from the equilibrium policy platform and the associated contribution level. We then compare results under alternative scenarios, namely, one single lobby group versus multiple lobby groups and one-sided lobbying versus two-sided lobbying.     

Transparency and special interests

In this paper opposing lobbies influence a politician via contributions. Society may grant access to decision relevant information. Transparency maximizes welfare if the lobbies have a similar size. Secrecy is optimal if their size is comparable, but not too similar.     

Lobbying under political uncertainty

This paper considers a model of lobbying described as a common agency game; it departs from the current literature by assuming that the special interest groups are not a priori organized or unorganized and that the type of the politician is not common knowledge. We characterize equilibria when the choice set of the politician consists of two policies; we discuss the conditions leading to efficiency and the characteristics of the groups explaining their relative success in the process of influence. We also offer some results for the general case, including disjoint necessary and sufficient conditions for the equilibria to be efficient.     

Informational and Monetary Lobbying: Expert Politicians,Good Decisions?

This paper finds that the strategic interaction between opposing interest groups depends on the decision maker's expertise. If the costs to provide information are sufficiently low, then the decision quality is nonmonotonic in the politician's expertise. An expert may attract less informational lobbying and make worse decisions than a politician who is ex ante endowed with less information and therefore less predisposed to a particular policy.     

SPECIAL INTEREST POLITICS AND INTELLECTUAL PROPERTY RIGHTS: AN ECONOMIC ANALYSIS OF STRENGTHENING PATENT PROTECTION IN THE PHARMACEUTICAL INDUSTRY

Since the 1980s, the pharmaceutical industry has benefited substantially from a series of policy changes that have strengthened the patent protection for brand-name drugs as a result of the industry's political influence. This paper incorporates special interest politics into a quality-ladder model to analyze the policy-makers' tradeoff between the socially optimal patent length and campaign contributions. The welfare analysis suggests that the presence of a pharmaceutical lobby distorting patent protection is socially undesirable in a closed-economy setting but may improve social welfare in a multi-country setting, which features an additional efficiency tradeoff between monopolistic distortion and international free riding on innovations.     

THE ECONOMICS OF ILLUSION*

When individuals choose not only goods, but also how to process information, there is a bias: people tend to process information so that they feel good about themselves. This bias is particularly important in voting behavior, where agents have almost no individual effect on public choice outcomes, and therefore almost no incentive for unbiased use of information. Two examples are given. In one example, an adaptation of the classic overdepletion problem, the public chooses not to counteract externalities by appropriate tax policy. In the second example public policy follows the choices of experts, contrary to the interest of the public.     

INTEREST GROUPS,DEMOCRACY, AND POLICY VOLATILITY

Democratic polities appear to produce more stable policy than do autocracies. In this paper, we explore a potential source of the policy stability observed in democracies: special‐interest groups. We find that interest groups are associated with greater stability in some measures of policy and that groups mediate the stabilizing impact of democracy on policy. We also find that the impact of interest groups on policy volatility depends on the degree of polarization in a society. (JEL P16, O43, D7)     

An informational perspective on administrative procedures

A number of scholars have identified the important role administrativeprocedures have in 'structuring' the interest group environmentof government agencies: determining who can participate andin what manner. Using a formal model, we analyze the incentivesand outcomes that different procedural - and therefore interestgroup - environments generate. The model yields a number ofimportant conclusions. First, because elected officials areconcerned not only about distributional rents, but also informationalones, the use of procedures in some cases will result in worseoutcomes for political principals on the policy dimension. Officialswill be willing to bear the losses in exchange for informationalgains. Second, under certain conditions, a politician is betteroff with a biased group monitoring the agency rather than aneutral one, since biased groups will subsidize a portion ofthe monitoring cost. Third, having multiple interest groups,including one in opposition to the politician, makes the politicalprincipal strictly better off than any other constellation ofmonitors, since competing interest groups will provide the greatestinformation at the lowest cost to the elected official.     

Globalization, Lobbying, and International Environmental Governance

Globalization may require supranational coordination of environmental policies to prevent strategic policy competition weakening environmental standards. This raises concerns about a democratic deficit at the supranational level, and the possibility of capture by special interest groups. The authors develop a model in which environmental policy can be set at the national or supranational level. Governments at each level act in the interests of the group they represent, and interest groups lobby to influence the probability of getting their type of government elected. Using asymmetries in lobbying costs, the authors analyze the effects of a democratic deficit and differential access to influence by different interest groups on the welfare of groups and nations. The paper shows: (i) asymmetries may have unexpected effects; (ii) asymmetries have greater effect when policy is set at the national rather than supranational level; and (iii) despite asymmetries groups and nations are better off when policy is coordinated at the supranational level.     

The Perverse Effect of Debt Tax Benefits on Firm Investment Decisions

In this paper we question the idea that the deduction of debt interest is always an effective policy instrument to spur firm investment. We analyse the investment decision in presence of a borrowing constraint on the amount of debt that the firm can raise. We show that if the debt interest rate is decreasing in the firm's capital accumulation and another financial resource more expensive than debt is available (at least for levels of debt lower than the upper bound), then the deduction of the debt interest from taxes on capital income may reduce firm investment. This theoretical result is relevant for economic policy decisions when financial intermediaries are not willing to finance beyond a certain threshold but firms have access to other sources of finance.     

Social Structure in Economic Theory

This paper investigates the factors that drive ruler decision making under democracy. By dividing politicians’ actions into two distinct domains and exploring their compositions, we construct a fuller and more realistic picture of politician decision making. In the non-discretionary domain, the politician’s actions are clearly limited by voter desires; in the discretionary domain the politician is free to make choices as he chooses without voter repercussions. Standard neoclassical models of political behavior suggest that when votes don’t matter, monetary income drives ruler behavior. While monetary pursuit may explain some ruler decisions, it leaves many other observed choices unexplained. Our non-discretionary/discretionary dichotomy highlights the up-to-now neglected role that psychic income plays in explaining otherwise unexplained ruler decisions. The case studies considered support this view.     

Endogenous Public Policy, Politicization and Welfare

In the two–stage political–economic game that we study public policy is the outcome of the interaction between interest groups and a two–tier government. Implementation of a policy proposed by a bureaucrat requires approval by an elected politician. The objective function of the bureaucrat hinges on the weight assigned to social welfare relative to the rent–seeking outlays of the interest groups. This weight represents the degree of politicization of the government. Our main result is that, in contrast to common belief, increased politicization need not adversely affect the public well–being.     

On Misunderstanding Government: an Analysis of the Art of Policy Advice

In the traditional economics literature government is treated as an agent exogenous to the economy. When economists confront situations where individuals cannot sign binding contracts, they invoke government as the “third party” that can enforce the contracts; after studying the macroeconomic problems of a country, economists frequently go on to tell what government should do to improve the outcome. It is argued in this paper that this is an erroneous view of government and is the reason why the advice of economists and other social scientists have had so little impact on government behavior. The difficulties of advising an endogenous government are highlighted by developing a new game, the Cheater's Roulette. It demonstrates that even when the adviser and the politician have very similar objectives, there may be no straightforward way to transmit the knowledge of the adviser to the politician. Having analysed the subject of advising government, the paper goes on to discuss, more speculatively, some general issues concerning the modeling of an endogenous government.     

TWO POLITICIANS,A PAC,AND HOW THEY INTERACT: TWO EXTENSIVE FORM GAMES*

Two sequential games of the interactions among a PAC and two politicians contesting the same office are developed, and their subgame perfect equilibria are characterized. The politicians have distinct ideal points in policy space, and this drives the result that the policy platforms they campaign on are not identical. The PAC always contributes only to the politician whose platform is closest to the PAC's ideal point, who is the politician whose ideal point is closest to the PAC's ideal point; as a result, both politicians’policy platforms are closer to the PAC's ideal point. The sequence of play does not qualitatively affect the outcome, but the PAC has a second mover advantage. Exogenous shocks to the probabilities of winning only modify the basic outcome.     

China's indigenous innovation approach: the emergence of Chinese innovation theory?

Theory-driven and theory-based studies on innovation in China are relatively scarce. Most innovation studies about Chinese business are based on Chinese policy and government programmes and their results. This special issue of Technology Analysis and Strategic Management explores China's indigenous innovation strategy and suggests a research agenda that focuses on Chinese innovation theory building that incorporates China's efforts to move towards an innovation-based economy. Currently, China is developing its indigenous innovation capabilities (The Chinese term is 自主创新, pronounced zizhu chuangxin). We suggest that innovation studies of Chinese business could focus on these indigenous innovation ambitions. In addition to this, it could adopt, and be embedded in a Chinese theory of innovation instead of a traditional Western-centric theory of innovation. Our proposition is that to better understand Chinese indigenous innovation, a new paradigm of Chinese innovation should be developed. We therefore present a research agenda that can be a starting point for the development of such a theory, and present seven papers in this special issue that give content to this idea. Obviously no theory will have a monopoly on exploring Chinese innovation phenomena, but it is interesting to add a Chinese-centric view into the Western-centric scholarly view. We hope that will be one of the contributions of this special issue on innovation in China.     

The Challenges of Climate Policy

Climate policy planners and the public should be aware of both economic challenges and arguments that may influence the intensity of the climate policies with which they have to cope. This article examines six economic challenges: cap‐and‐trade versus taxes, non‐price regulations, energy efficiency policies, mitigation versus adaptation, trade effects, and transmission planning. Three additional challenges affect the end itself: ‘fat tails’, discount rates, and whether environmental protection should be evaluated by willingness to pay. If future generations cannot compensate the present for climate policy costs, climate policy is inherently redistributive and cannot be evaluated through cost–benefit analysis alone.