W ho Need sLob b ies?
Asymmetric Inform ationand Non-M onetary Lob b ying
C
»aglar OÄ z d en¤
E m ory U niversity
Dec emb er 199 9
- Very P relim inary - P lease d o not quote or d istribute w ithout perm ission-
A bstract
T his paper focuses on the policy decisions of a self-interested government in° uenced by
special interest lobby groups through monetary contributions. T he main innovation of the
paperis the focus on asymmetric information between the lobby group and the government
whichis introducedthroughcertainparameters oftheobjectivefunctionofthelobbygroup and
theeconomicenvironment.T henthegamecanbeanalyzed as astandard signalingproblem in
whichthemonetarycontributions areusedtocrediblyrevealthetypeofthelobbygroup as well
as todistributethe gains from thepolicy distortion.Firstweanalyzetheinteraction between
thesetwofunctions and showthatthe distortion is decreased.N extwe introduce othercostly
non-contributory lobbyingprocesses thathave been neglected in the literature.W e introduce
various scenarios and aim to determine underwhich conditions the lobby prefers to use such
mechanisms as opposed todirectmonetarycontributions.
¤
Departm ent ofE c onom ic s,E m ory U niversity,Atlanta,G A 30 32 2 .e-m ail:c oz d en@em ory.
ed u.
1
1
In
trod uc tion
T hestandard models oflobbyingviewthestrategicinteraction between thelobby group as oneof
exchangeofmonetarycontributionsinreturnforsociallyine±cientpolicies.Forexample,G rossman
andH elpman,analyzeequilibrium tradepolicyformationinaseries ofpapers [1 994,1 995a,1 995b]
wherespecialinterestarerepresentedbylobbieswhopresentthegovernmentwithamenuofoptions
wherethereis atrade-o®betweenmonetarycontributionanddistortionarytradepolicy.T heyshow
thattheequilibrium outcomemaximizes thejointsurplus ofthelobby and thegovernmentatthe
expense ofsocialwelfare.H owever, a casualobservation ofactuallobbyingbehaviorreveals that
a majorportion ofthe lobbying activities and expenses are notin the form ofdirect monetary
contributions.Furthermore, mostlobbyists claim thatthey serve a unique purpose ofproviding
information tothe politicians.T he aim ofthis paperis toclose the gap between actuallobbying
behaviorand analyticalmodels by focusingon thesetwoobservations.
T hereis an emergingliterature,especiallyin politicalscience,which argues thatlobbyingplays
a signi¯cantinformationalrole. In his standard undergraduate textbook, W right[1 996]devotes
a whole chapterto the issue ofaccess, uncertainty and strategic use ofinformation. T he main
argumentin this bookand manyotherpapers is thatinterestgroups achievetheiraims bystrategically providing information thatis valued by the politicians. A s mostothereconomic agents,
politicians and legislators operate underaheavy cloud ofuncertaintyand anyinformation about
theultimateimplicationofthepolicydecisions areextremelyvaluable.G iventhelimitedtimeand
otherresources and the comparative advantage ofinterestgroups is gathering information, itis
naturaltoobserve collaborative e®orts between the interestgroups and the legislators.H owever,
information is powerand theinterestgroups havealltheincentivetodistortthefacts toin° uence
thedecisions ofthepoliticians whoarekeenly awareofthis fact.T his is the¯rstimportantpoint
ofourpaper.M onetary contributions willserve as a source ofcredibility forthe interestgroups
since only the information provided by the groups whocan \ puttheirmoney where theirmouth
is"willbe listened to.T his signalingand information transmission role ofthe contributions is a
subtle, yetimportantone compared to the traditionalrole ofdistributing the gains between the
lobbyand thepolitician from policydistortions.
T he nextimportantquestion in the paperis on the prevalence ofnon-contributory lobbying
2
activities. T hese include advertising and public relations campaigns, grassroots activities, mailingand telephone campaigns,demonstration,hiringexpensivelawyers as lobbyists in the capitol.
M ostoftheseactivities areaimedtoprovideinformationtothepoliticianandtheydonotdirectly
enterhis objective function. H owever, these activities actually constitute a big majority ofthe
expenditures ofmany lobby groups. D espite theireconomic and politicalsigni¯cance, there are
almostno papers in the literature which asks whatmotivations lead the lobby groups to implementsuch activities as opposed todirectmonetary contributions.Itis importanttoidentify the
conditions underwhichnon-contributoryactivities willbeemployed insteadofmonetarycontributions as informationtransmissionmechanisms.W eshowthatiftheobjectivefunction ofthelobby
group satis¯es thesingle-crossingcondition (SCC),then thelobbies willalways usemonetarycontributions torevealtheirtypes and willneveruse othercostly lobbyingactivities.Single-crossing
means the marginalbene¯tofthe policy distortion has to be increasing in information parameterand in a signaling game this condition is su±cientfordi®erenttypes to sortthemselves and
revealtheirtypes in equilibrium.M ore importantly, this resultis robusttothe factwhetherthe
socially optimalpolicy depends on the information parameterornot. Even ifthe socialwelfare
depends on this parameterand there are othermechanisms to revealthe information, the lobby
group willchoose directcontributions as longSCC is satis¯ed.T his implies thatlobbies willuse
non-contributoryactivities wheneverthesingle-crossingcondition is notsatis¯ed andtheinformationcannotberevealedthroughcontributions.H owever,theseactivities willbeusedonlywhenthe
governmentcares aboutthe private information, in otherwords, socially optimalpolicy depends
on this parameter. Finally, we ask underwhatconditions the lobby groups mightrestricttheir
ability to make monetary contributions.W E showthat, as longas the contributions can reveal
theinformation e±ciently,this willneverhappen.Even in situations where they can notbeused
and otheractivities are used torevealinformation, contributions are used todistribute the gains
from distortion.T heonly time lobbies would committonotusingcontributions is when itwould
enablethem toemployvaluablenon-contributoryactivities such as collaboration with otherlobby
groups.
T here is a related strand in the politicalscience literature. the main argument is that the
lobbies makemonetarycontributions togain access tothepoliticians (whohavelimited time)and
toconvincethem abouttheoptimalpolicies.A usten-Smith[1 993,1 995,1 997]providemodelswhere
3
campaigncontributionsactassignalsofpolicypreferences.L ohmann[1 995]providesamodelwhere
the lobby groups provide reports abouttheirprivate information and have to pay contributions
toenhance theircredibility when reports are con° icting.hermain focus, though, is on the freeridingproblem ratherthan the con° ictbetween di®erentroles played by contributions.L ohmann
[1 993]provides models where the governmentobserves private politicalactivity to obtain better
information aboutthe state ofthe world and analyzes the incentives forthese actions.L ohmann
[1 993, 1 995, 1 998]provides models with multiple lobbies where the interests ofdi®erentlobbies
are opposed and the government infers the true value ofa policy parameterfrom the strategic
interaction between these lobbies.H owever, amajorshortcomingin the literature is the absence
oftheexplanation forthecommon presenceofnon-monetarylobbyingactivities.T his is themain
di®erencebetween this paperand theliteratureon lobbying.
T his paperfocuses on thepolicydecisions ofaself-interested government.In apartialequilibrium framework,alobbyrepresentingtheinterestsoftheproducerstriestoin° uencethegovernment
through monetarycontributions as in theG rossmanandH elpman[1 994]modelofin° uence-driven
contributions and theelectoralcompetition models ofM agee,B rockand Y oung[1 989]
.T he main
questions ofthe paperare addressed in a trade policy context, butcan be easily extended to a
generalframework. T he ¯rstmodeldepicta smallcountry where the socially optimalpolicy is
free trade regardless ofthe demand and supply parameters.A positive tari®rate simply creates
distortions in the economy and the contributions areused todistributethe jointsurplus between
thelobbyandthegovernment.T helobbymakes ano®erthatconsists ofatari®andacontribution
and thegovernmentdecides toacceptorreject.W eintroduceinformationalasymmetrythrough a
supplyparameterandshowthattheproblem becomes asimplesignallingproblem.Inequilibrium,
the high types choose jointly e±cienttari®s as in the perfectinformation case, butthe lowtype,
however,implements lowertari®s compared tothejointlyoptimalone.T his is the¯rstimportant
resultofthe paper.Informationalproblems actually improve socialwelfare and they preventthe
lobbyand thegovernmenttocolludeperfectlywhen thelobbytries torevealhis information.
.
T hen we introduce othercostly lobbyingactivities thatcan potentially signalthe type ofthe
lobby.H owever,weshowthatthesewillneverbeusedinequilibrium sincethemonetarycontributions are moree±cientas longas the single-crossingproperty is satis¯ed.W e alsoshowthatthe
lobbies willnever¯nd ite±cienttocommitthemselves tonotusingmonetarycontributions since
4
thesearestillused todistributethegains.
.
Inthenextmodel,weassumethatthecountryis largeanditcana®ecttheworld prices which
causes the optimum tari® to be positive. T he optimaltari® depends on the supply parameter
which would provide asocialwelfare rationale forlobbying.W e showthatallofresults from the
smallcountry modelarecarried tothis model.T helobbies sortthemselves and revealtheirtypes
perfectly and they neveruse othernon-monetary activities in equilibrium despite the facttheir
information is valuable to the government. T he monetary contribution is a su±cient and more
e±cientmechanism toextractalloftheinformation from thelobbygroup.
Finally, we introduce anotherform ofuncertainty aboutthe demand parameters. T he small
country results carry on this section as wellsince the socially and the jointly optimalpolicies do
not depend on this parameter. H owever, in a large country setting where the socially optimal
policy depends on this parameter, the results are completely altered. W hen the objective function ofthelobby group nolongersatis¯es thesingle-crossingcondition theseparatingequilibrium
can no longerbe satis¯ed. T he lobbies can notrevealtheirtypes credibly through contribution
mechanisms although itis in theirand the governments'
s interestto do so. Ifthe costfunction
ofnon-contributorylobbyingactivities satisfythesingle-crossingcondition,then theywillbeused
by the lobbies tocredibly convey information tothe government, especially by the high types.A
coordinated e®ortbetween theproducerand theconsumeris an exampleofthis sortofactivities.
Furthermore,itmightbee±cientforthelobbygroup tocommitnottousemonetarycontributions
inequilibrium,sinceitmightmakeiteasiertocoordinateactivities withtheconsumers.T his might
explain whythelobbygroups would actuallysupportlimits on campaign contributions.
In thenextsection,wesetup thesimplesmallcountrymodel.T hen weintroduceasymmetric
information through the demand parameters and set up the mechanism design problem. N ext
welookatwhethernon-contributory activities would arisein equilibrium.T hen wecarry outthe
sameanalysis forthelargecountrysetting.W ethenintroduceasymmetricinformationthroughthe
demand parameterand showhowcostly lobbyingactivities would ariseas equilibriums strategies.
Conclusions follow.
5
2
A M od elofa Sm al
lCoun
try
A llofthe models in this paperwillanalyze the interaction between a selfinterested government
and alobby group representingasingleindustry thathas tocompetewith foreign producers.W e
willbeemployingaverystylized partialequilibrium modeltoderiveanalyticalsolutions but,as it
willbe clear,the results can be easily extended toamoregeneralsetting.In this ¯rstsection we
willmodelasmallcountrywhich willtaketheworld prices (pw )ofaproductgiven.T hedomestic
pricewillsimplybetheworld priceand thetari®ratewhich themain policyinstrumentavailable
tothegovernment:
pd = pw + t
T hedemand is given byasimplelinearrelationship:
pd = A ¡Q
where Q is the totaldomestic consumption. T he domestic supply Q d is given by the following
equation
Q d = q+ ¯pd
(1 )
and the restofthe consumption is imported.T he quantity imported is denoted by Q w and, by
de¯nition,wehaveQ = Q w + Q d .Inthis simplemarketstructure,theconsumersurplus,producer
surplus and tari®revenuearegiven by
1
2
[A ¡pw ¡t]
2
1
2
P S (t) = q[pw + t]+ ¯ [pw + t]
2
T R (t) = t[A ¡q¡(1 + ¯)(pw + t)]
C S (t) =
(2)
T hesocialwelfareis thesum ofthesethreewelfaremeasures:
W (t)= C S (t)+ P S (t)+ T R (t)
Itcanbeeasilyshownthatfreetrademaximizes socialwelfare.Followingthestandardapproachin
theliterature,weassumethatthegovernment'
s objectivefunction is alinearsum ofthemonetary
6
contributions it collects from the lobby group that represents the producers'interests and the
aggregatesocialwelfare:
G (t;C )= ®W (t)+ C
where1 ¸® ¸0 is therelativeweightattachedtothesocialwelfare.W eassumethatthemembers
ofthelobbygroup managedtoovercomethefree-riderproblem andtheymaximizethejointwelfare
ofthe producers.T hese members constitute a negligible portion ofthe consumers in the society
so that the objective function of the lobby group is the producer surplus minus the monetary
contributions:
L (t;C )= P S (t)¡C
G rossman and H elpman [1 994]assume thatthe strategicinteraction between thelobby group
andthegovernmenttakes theform ofamenuauctiondescribedbyB ernheim andW hinston[1 986]
.
In theirmodel,thelobbygroups chooseapoliticalcontribution scheduleas afunction ofthetari®
rates.Inthesecondstage,thegovernmentchooses thetari®ratethatmaximizes its welfare.T hen
thetari®is implementedandthemonetarycontribution is made.T helobbywillproposethetari®
rateand thecontribution thatwillleavethegovernmentindi®erentbetween this proposaland the
free trade: C (t)= ® [W (0 )¡W (t)]
. W hen we substitute this into the lobby group'
s objective
function, we get L (t) = P S (t)¡® [W (0 )¡W (t)]
. T he optimal tari® will simply maximize
this expression which means that the equilibrium tari® rates maximize the joint welfare ofthe
governmentand thelobbygroup1 :
tj = argmaxP S (t)+ ®W (t)=
t
q+ ¯pw
® (1 + ¯)¡¯
(3)
T he equilibrium contribution, C j, will leave the government indi®erent between the free trade
outcomeand implementingtj.T his is given by
1
C j = ® [W (0 )¡W (tj)]= ® [1 + ¯]t2j
2
(4)
In equilibrium,thelobbywillo®ertopay apoliticalcontribution ofC j in return forimplementing
tj and thegovernmentwillaccept.G rossman and H elpman [1 994]settingassumes thatthelobby
1
W e w illassum e that ¯ <
®
1¡®
so that the equilib rium tari® ratesare positive.
7
group has allofthe bargainingpowerand thereforecaptures allofthe surplus.W e willcontinue
tomakethis assumption when weextend themodeltotheasymmetricinformation setting.M ore
speci¯cally,wewillassumethatthelobbygroup possesses someprivateinformationthatwouldaffectthewelfareofthegovernment.T helobbywillmakeacombinedo®erofcontributions forhigher
tari®s and the governmentwilldecide to acceptorreject. W ith the introduction ofasymmetric
information,thestrategicinteraction turns intoasignallinggamefrom amenu auction.
A ssignmentofthebargainingpowertothelobbygroup mightsound restrictive,butthequalitativeresults ofthepaperwillcontinuetohold evenifthegovernmenthadsomeofthebargaining
power.H oweverthis would take us intothe rathercomplicated world ofbargaininggames under
asymmetricinformation whereanalyticaltractabilitybecomes ratherscarce!
3 Asym m etric Inf
orm ation
W e will introduce the asymmetric information into this model through the parameters in the
domesticsupplyfunction given in [1 ]
.Inthis functiontherearetwoparameters,qand ¯,thatcan
providetheuncertainty.Foramomentassumethat¯ is known bythegovernmentwith certainty
butqcantakemultiplevalues andonlythelobbyknowsthetruevalue.W eknowthatthelobbywill
o®erthecontribution C j given by[4]in return fortheimplementation ofthetari®tj given by[3]
.
H owever,thecontribution C j does notdepend on qand,therefore,regardless oftheirinformation
(theirtype),alllobbies willo®erthesamecontribution;although theywilldemand di®erenttari®
rates.T he o®ermade to the governmentwillrevealthe true type ofthe lobby even the though
thetypeofthelobbyhas nostrategicvalueforthegovernmentsinceitdoes notenterits objective
function. T he conclusion is thatthe asymmetric information need to a®ectthe welfare ofboth
parties forittobeofanyeconomicand strategicinterest.
In lightofthis discussion,wewillassumethat¯ can taketwovalues.A tthebeginningofthe
gamethenaturecan assign alowvalue¯ l with probabilityp and ahigh value¯ h with probability
[1 ¡p]where¯ h > ¯ l .T helobby group observes thetruevalueof¯ whilethegovernmentknows
onlytheaboveprobabilities.W eshouldnotethatthesociallyoptimaloutcomeis stillfreetradeand
thereforeitdoes notdepend onthetypeofthelobbygroup.H owever,thecontribution demanded
from thelobbygroup andthedistortedtari®ratetj dependon¯.Furthermore,wewillalsoassume
8
thatq= 0 forthetimebeingtosimplifytheanalysis.
T he strategic interaction between the lobby group and the governmentis a simple signalling
game, as we discussed above, given the nature of the asymmetric information. In a signalling
game,thesender(the lobby)sends amessage (the tari®demanded and contribution o®ered)and
thereceiver(thegovernment)observes themessagewithouttheknowledgeofthetruetypeofthe
lobby.T henthereceiverchooses an actionfrom thefeasibleset(whichis toacceptand implement
the proposed tari®s or to reject and implement free trade)and the payo®s are realized. T he
equilibrium requires that(1 )thegovernmentshouldusetheB ayes'ruletoupdateits beliefs about
thetypeofthelobbyaccordingtothesignalobserved,(2)thegovernment'
s actionshouldmaximize
its payo®given thesebeliefs,(3)the lobby'
s signalshould maximize its payo®given the expected
response ofthe government.In signallinggames, we can have separating(where each type sends
adi®erentsignalwhichwould revealthetruetype),pooling(wheredi®erenttypes would send the
samesignaland nonewinformation is revealed)orhybrid equilibriadependingon theparameters
ofthegameand equilibrium conceptbeingused.
In this section, we aim to determine what the equilibrium of the signalling game will look
like. First, note that the objective function of the lobby group, L (t;C ;¯)= P S (t;¯)¡C =
1
2¯
2
[pw + t]
¡C ,satis¯es thesinglecrossingcondition:
³
´
³
´
P S t t;¯ h > P S t t;¯ l
T he marginalvalue ofthe tari®is higherforhigh types. Single-crossing property can be more
easilyobserved in graph [1 ]wherewehavetheindi®erencecurves ofdi®erentlobbytypes between
contributions and thetari®.T helowtype¯nds thebene¯tfrom agiven increasein thetari®less
valuablethen thehigh typeand,thus,would bewillingtocontributeless forit.Sincetheseminal
paperofSpenceon job-marketsignalling,this property has importantimplications on thenature
oftheequilibrium thatwillbechosen in this game.
T hegovernmentis concerned aboutcorrectlyidentifyingthelobbyfrom thesignalsent.U nder
perfectinformation,thecontributionequalsthelossinpayo®forthegovernmentfrom implementing
agiven tari®.W ewillletth (tl)and C h (C l)denotethetari®and thecontribution o®erofahigh
(low)type underperfect information2 . T hese are given by given by [3]and [4]
. Forthe same
2
For the rest ofthe paper, w e w illref
er to the governm ent as\it", the low type as\he" and the high type as
9
signals tobesentunderasymmetricinformation,neithertypeshould havetheincentivetoimitate
theotherone.L owtypewillprefertosend tl and C l ifthefollowingholds:
³
´
³
´
P S tl;¯ l ¡C l > P S th ;¯ l ¡C h
(5)
£
¤
¡ ¢
l
2
W e know that C = 12 ® [1 + ¯][t]
and tl = ® 1+¯ ¯plw ¡¯ l = argmaxP S t;¯ l ¡ 12 ® 1 + ¯ l t2 .
(
¡
¢
¡
¢
£ ) ¤£ ¤2
¡
¢
T his implies P S tl;¯ l ¡C l > P S th ;¯ l ¡ 21 ® 1 + ¯ l th .W e alsoknowthatP S th ;¯ l ¡
£
¤£h ¤2
¡
¢
£
¤£ ¤2
1
l
t
> P S th ;¯ l ¡ 21 ® 1 + ¯ h th . T hese two inequalities, together, imply that
2® 1 + ¯
¡
¢
¡
¢
P S tl;¯ l ¡C l > P S th ;¯ l ¡C h . T herefore, in equilibrium, the low type willneverwantto
imitatethehightype.T heparallelconditiontopreventthehigh typefrom imitatingthelowtype
is given by
³
´
³
´
P S th ;¯ h ¡C h > P S tl;¯ h ¡C l
(6)
U nfortunatelythis conditiondoes notnecessarilyhold forallparametervalues.Ifitdidhold,then
both types would make the ¯rst-besto®ers and maximize theirwelfare. T he governmentwould
identify theirtypes, acceptthe o®ers and the game would end.Itcan be shown thatthe higher
the ® is and closerthe values of¯ h and ¯ l are, the less likely thatthis incentive constraintwill
hold.Furthermore,ifthe type spacewas continuous,then thecontinuous equivalentoftheabove
constraintwould neverhold.A n example where thehigh type would liketoimitate the lowtype
is given in graph [2]
. Forthe restofthe paper, we willassume thatthe above condition is not
satis¯ed which causes thehigh typeto\ envy"thelowtypeand towanttoimitateits actions.
Ifthelowtypeweretomakehis ¯rst-besto®er(tl;C l)in equilibrium,high typewillmakethe
sameo®er.T henthegovernmentwillmaintainits priorbeliefsaboutthetypessincenoinformation
is revealedinapoolingequilibrium andwillrejecttheo®ertoimplementfreetrade.T his response
from thegovernmentmakes bothtypes worseo®andinequilibrium,thelowtypewillalterhis o®er
topreventimitation bythehigh type.T his can bemoreeasilyseen in graph [2]
.Curves denoted
by G h and G l aretheindi®erencecurves forthegovernmentwhen thelobby is high and lowtype
respectively.Curve L
h
(L l)is the indi®erence curve forthe high (low)type lobby goingthrough
its ¯rst-bestpointdenoted by H (L ).H igh type prefers pointL toits own optimalpointifthe
governmentweretoacceptitsinceshewouldsaveconsiderablyoncontributions withoutsacri¯cing
\she.
"T hese are c hosenrand om ly and w e have no gend er b ias.
10
toomuch on the tari®.H owever, ifthe governmentknewitwas the high type whoo®ered L , it
would certainly rejectthe o®ersince the o®erlies to the rightofthe indi®erence curve G h going
though the free trade point(0 ;0 ).G iven this incentive ofthe high type toimitate, lowtype will
actuallyo®erthetari®-contributionpairgivenbypointE .T hehigh typeis indi®erentbetween E
and H (they are on the same indi®erence curve L h )so has noincentive toimitate the lowtype.
T hegovernmentis alsoindi®erent(itis ontheindi®erencecurveG l),butthelowtypeis worseo®
compared totheperfectinformation casesinceitis totheleftofhis indi®erencecurveL l.
T his equilibrium is nottheonly perfectB ayesian equilibrium ofthis signalinggame.A ctually
there are many otherseparatingequilibria as wellnumerous otherpoolingand hybrid equilibria.
T hismultiplicityarises from thefactthatwedidnotspecifythebeliefs abouttheout-of-equilibrium
actions. M any strange equilibria can be supported by equally strange, butperfectly acceptable,
beliefs as perfectB ayesian equilibria. T o resolve this problem, Cho and Kreps [1 987]propose a
re¯nementtoeliminatemanyoftheseunreasonableequilibriacalledtheintuitivecriterion.W ewill
notgointothe technicaldetails on the restrictions they impose on the o®-the equilibrium beliefs
and referthereadertotheirpaper.Instead,wewillsimplyprovidetheimplication oftheirresult
forsignalinggames with thesingle-crossingpropertyforourmodel:
P roposition 1 :In thesignalinggamedescribedabove,onlythefollowingequilibrium is consistent
with the intuitive criterion:T he high type o®ers H,its perfectinformation optimalpoint.T he low
typeo®ers E whichgives alowerandlowercontribution then herperfectinformation optimalpoint.
T he governmentaccepts both o®ers.
G iventhisequilibrium,wecanstatethe¯rstimportantresultofthepaperwhichdirectlyfollows
from it:
Corollary2 :T he distortion from thesociallye±cientoutcome (freetrade)is lowerunderasymmetricinformation than underperfectinformation.
Inthissignalinggame,themonetarycontributiono®eredtothegovernmentservestwopurposes.
T he¯rstis todividethesurplus obtained between thegovernmentand thelobby (attheexpense
ofthe society)through distortion ofthe outcome away from the socially e±cientfree trade level.
11
Since we assume the lobby makes the o®er, ithas allofthe bargainingpowerand extracts allof
this surplus.T his is therolethathas beenemphasizedmanytimes intheliterature(seeH elpman'
s
survey [1 995]
.
) T he second and more interesting one is the role played by the contribution in
equilibrium sothattheprivateinformation is perfectlyrevealed.M orespeci¯cally,alowtypehas
too®eranevenlowertari®andcontributionpair(thanwhatperfectinformationscenariorequires)
to prove that the tari® is not too valuable to him and to credibly signal his type. A higher
contribution means highermarginalbene¯ts from distortion and thereforeleads highertari®s and
signals thatthelobbyis ahightype.T hetwopurposes ofthemonetarycontributions areopposing
in the scenarioforthe lowtype which causes the tari®to be belowthe jointly optimallevel.In
otherwords,thegovernmentandthelobby'
s inabilitytoperfectlycoordinatetheiractivities dueto
asymmetricinformation, decreases the socialdistortion they would otherwise create and actually
bene¯ts thesociety.T heroleofmonetarycontributions as asignalingdeviceis notemphasized in
theoverallpoliticaleconomyliteraturemainlyduetotheabsenceofimperfectinformationmodels.
T here are severalcomparative statics observations we can make. First, the gap between the
£
¤
type parameters ¯ h ¡¯ l , has interesting implications. T he closerthe two types are, the more
likelyitwillbeforthehigh typetoimitatethelowtype.H owever,theclosertheparameters are,
thecloserthepoints H andL arewhich means closerwillbeL andE .T herefore,therewillbean
optimum di®erencebetween thetwoparameters from thesociety'
s perspective.
A notherinterestingobservationis about®,theweightattachedbygovernmenttosocialwelfare.
First, the distortion will be lower when this parameter is higher since it increases the cost of
distortion tothe lobby.Second, high type willbe more likely toimitate the lowtype when ® is
highersince, again, ithas topay a much highercompensation.T herefore, higher® provides two
bene¯ts:O neis tolowerjointly e±cienttari®s (from thegovernmentand thelobby'
s perspective)
and the second is topush lowtype into choosing a separating equilibrium where tari®s are even
lower.
Finally,wewilllookatthesocialcostofimplementingpositivetari®s.D e¯ne¢ (t)as thesocial
costofimplementingpositivetari®s:¢ (t)= W (0 )¡W (t)= 12 [1 + ¯]t2 .T heexpectedsocialcost
¡ ¢
¡ ¢
¡¢
underperfectinformationisp¢ tl0 + [1 ¡p]¢ th0 andunderasymmetricinformationitisp¢ tl +
¡ ¢
[1 ¡p]¢ th .T he second components are the same since same tari®levels are implemented for
£ ¡¢
¡ ¢¤
thehigh types.T hesocialwelfaregainduetoinformationalasymmetryis p ¢ tl ¡¢ tl0 T his
12
expressionis always positiveas wewouldexpectsincetherearesocialgains whenthelobbyis alow
type.W e observe the largestgains from uncertainty atthe highestvalue ofp (justbelowperfect
information)when theactualuncertainty is low.
4
O ther Lob b yingAc tivities
M ostlobbygroups claim thattheiractivities areaimedtoprovidethegovernmentwithinformation
sothatsociallye±cientpolicies areimplementedas wementioned in theintroduction.In thecase
ofasmallcountry,thesociallye±cientpolicyis freetrade(tari®rates equaltozero)regardless of
thelobbygroup'
s typesothelobbyingactivityis simplyaimedtodistortthepolicyawayfrom the
socially optimalleveltoearn rents.Contributions aremainly used todistributethis jointsurplus
through monetarycontributions.
A nother neglected point in the literature is the availability of lobbying mechanisms (other
than monetary contributions)tothe lobby groups.T hese can include, butare notrestricted to,
mailingcampaigns,telephonemarathons,hiringexpensivelawyers tolobbyontheirbehalftomeet
politicians and hiring retired politicians. A casual analysis would reveal that direct campaign
contributions are actually a small portion of the overall budgets of large lobby groups. T hese
activities are as costly as far as the lobby groups are concerned but do not involve any direct
transfers to the government. T hese activities do notdirectly enterthe objective function ofthe
government(as opposed to monetary contributions), buttheirvalue arises from the signals they
convey to the governmentaboutthe private information (types)possessed by the lobby groups.
W ewillrefertotheseas non-contributorylobbyingactivities as opposedtomonetarycontributions
and willdenotethem as P .
T hesecondaim ofthis paperis toseeunderwhatconditions wouldthelobbies prefertoengage
in these activities as opposed to(ortogetherwith)monetary contributions in ordertohavetheir
preferred policies implemented.W ewillassumethatthemodi¯ed objectivefunction ofthelobby
group is given by
L (t;P ;C ;¯)= P S (t;¯)¡Z (P ;¯)¡C
where Z (P ;¯)is the cost of other non-contributory lobbying activities. W e will assume that
¡
¢
¡
¢
Z 0 ;¯ h = Z 0 ;¯ l = 0 , Z P (P ;¯)> 0 , Z PP (P ;¯)> 0 and Z (P ;¯)satis¯es the single crossing
13
condition as well:
Z
³
´
l
P
;
¯
> Z
P
³
´
h
P
;
¯
P
T his expression implies thatthemarginalcostofengagingin non-contributoryactivities arelower
forhigh types. Since the marginal bene¯t ofa tari® is increasing in the type parameter, it is
naturaltoassumethatthemarginalcostis decreasinginthetypeparameter.T his assumptioncan
bejusti¯ed byseveralobservations.Itmightbeeasierforhigh types toovercomecollectiveaction
problems toform alobbyand collectmoneyfortheoverallbudget(and otherlobbyingactivities)
sincethepotentialpayo®from amarginaltari®increase(P S t(t;¯))is higher.H igher¯ alsoimplies
highernumberof¯rms ifweassume thattheindustry is composed ofidentical¯rms.W ith more
members,thelobbycan generatemoreletters tothepresidentand telegrams totheCongress ata
lowermarginalcost.
T he modi¯ed game progresses according the following sequence ofactions. Firstits type is
revealed tothelobby group.N extthelobbydecides whethertoengagein otheractivities P .Ifit
decidestodoso,theseactivities areundertaken.T hegovernmentobservesapositivevalueofP and
updates its beliefs aboutthetypeofthelobbyaccordingtothis signal.T hen thelobbydecides on
thetari®and contribution o®ertothegovernment.T hegovernmentupdates its beliefs according
totheobservation ofthis o®er,decides toacceptorreject.Finally,thetari®is implemented,the
contribution is madeand thepayo®s arerealized.
In theprevious section,weshowedthatthegovernmentand thehigh typemanagetoestablish
the tari®th thatmaximizes theirjointpayo®in the absence ofany otheractivities.T osignalits
truetype,thelowtypelobbyends up o®eringatari®and acontribution lowerthan the¯rst-best
underperfectinformation.G iven this outcome,the high typehas noincentivetoengage in other
lobbyingactivities P and spend extraresources sinceitcan notdoanybetter.
T helowtype,ontheotherhand,wouldliketo¯ndanotherandless costlymechanism tosignal
its type. Ifthe lowtype was successfulin credibly signalling its type to the governmentin this
stage,thentherewouldbenoneedtoo®erthetari®-contributionpairgivenbypointE inthenext
stage topreventthe high typefrom imitatingit.Instead,thelowtype would o®erpointL ,since
the governmentwould acceptit(knowingitis comingfrom the lowtype).Suppose the lowtype
14
sends signalP l in the¯rststage.T hen weneed thefollowingtohold:
Z
³
´ h
³
´
i h
³
´
i
P l;¯ l < P S tl;¯ l ¡C l ¡ P S tE;¯ l ¡C E
(7)
where(tE;C E)arethetari®andthecontributionatpointE .T his conditionstates thatthebene¯t
¡
¢
ofsendingthesignalP l should behigherthan its cost.IfweassumethatZ P l;¯ l is continuous,
¡
¢
this condition willbe satis¯ed forsome positive value ofP since Z 0 ;¯ l = 0 .Second, itshould
notbe in the interestofthe high type to imitate the lowtype and send the same signalin this
stage:
³
´
³
´
³
´
P S th ;¯ h ¡C h > P S tl;¯ h ¡Z P l;¯ h ¡C l
First,wewillnotethatZ
(8)
¡ l h¢
¡
¢
P ;¯ < Z P l;¯ l becauseofthesingle-crossingpropertyofthis cost
function.T wotwoconstraints jointlyimplythat
h
³
´
i h
³
´
i h
³
´
i h
³
´
i
P S tl;¯ l ¡C l ¡ P S tE;¯ l ¡C E > P S tl;¯ h ¡C l ¡ P S th ;¯ h ¡C h
T hehigh typeis indi®erentbetween H and E which implies
³
´
³
´
P S th ;¯ h ¡C h = P S tE;¯ h ¡C E
Substitutingthis expression intotheprevious oneleads to
³
´
³
´
³
´
³
´
P S tl;¯ l ¡P S tE;¯ l > P S tl;¯ h ¡P S tE;¯ h
H oweverthis can notbetruewhentl > tE becauseofthesingle-crossingpropertyoftheP S (t;¯).
T herefore, the two constraints can neverbe satis¯ed simultaneously implying the high type will
alsotrytoimitatethelowtypeand send P l as well.T hefollowingproposition willsummarizethe
equilibrium ofthis modi¯ed gamewith non-contributorylobbyingactivities:
P roposition 3 :N o type oflobbygroup willengage in any otherlobbyingactivities.
W eshould onceagain emphasizethattheweused thesinglecrossingpropertyoftheproducer
surplus function P S (t;¯)and thecostfunction Z (P ;¯)toderivetheseresults.W ewillrelaxthe
¯rstassumption in a latersection in the paper.T he second assumption is more signi¯cant.T he
costofsending any signalis lowerforthe high type, therefore there is no way forthe low type
15
to credibly signalhis type to the governmentsince the high type can easily imitate this action.
A ctually, forcredible signalling, we need to opposite ofthatassumption to hold. T he marginal
¡
¢
¡
¢
costofasignalhas tobelowerforthe lowtype:Z P P ;¯ l < Z P P ;¯ h .W ecan conclude that
therewillbenonon-contributorylobbyingunless this conditionis satis¯edwhichis unlikelyunder
manyreasonableassumptions aboutthelobbyformation.
A notherinterestingissuearises when thelobbies can commitnottomakemonetarycontribu-
tions afterthey take the action P . T his can be imposed through campaign contribution limits
and the issue is likely to be amongthe mostwidely discussed ones in the upcomingP residential
elections. W e willassume thatthe lobbies can credibly commitnotto make any contributions.
Furthermore,thegovernmentknows thatonceapositiveP is observed,then therewillbenocontributions inthenextstage.U ponobservationofP ,regardless oftheits value,thegovernmentwill
simplyimplementzerotari®s sincethatmaximizes its welfare.Sincetheseactivities arecostlyand
donotimpactthe actions ofthe government, they willnotbe undertaken either.H owever, both
types oflobbies obtainhigherpayo®s byo®eringcontributions inexchangefordistortionarytari®s.
T herefore, we willneverobserve voluntary commitmenttoabstainingfrom makingcontributions
byanylobbytypein equilibrium.
A swehadstatedearlier,wehadtwoaims inthispaper.A nalyzethestrategicissues inlobbying
when there is asymmetric information and analyze the signi¯cance ofnon-contributory lobbying
activities.A lthough,theanalysis is carriedoutinatradepolicycontext,itcan easilybeextended
tootherpolicycontexts.W hentheimperfectinformationis onlyaboutthetypeofthelobbygroup
and the socially optimalpolicy (in the absence oflobbying)is known by the government, lobbies
willnotengagein othernon-contributory activities torevealtheirtypes.T hesameoutcomes can
beobtained through directcontributions withoutincurringthe costs ofthese activities.T hus we
can conclude that, lobby groups willengage in otheractivities only when itprovides information
aboutsociallye±cientoutcomes.T his is thescenariowewillanalyzein thenextsection.
5 A M od elofA Large Coun
try
Inthis section,wewillmodifytheabovegamesothatthesociallyoptimalpolicyis nolonger¯xed
regardless ofthetypeofthelobbygroup.W ewillassumethattheworldsupplyis givenbyQ w = pw
16
wherethecountrycan implementpositiveoptimum tari®sinceitcan e®ecttheworld priceofthe
product.T hedomesticdemand is thesameas in thesmallcountry caseand thedomesticsupply
is again given byQ d = qtosimplifytheanalysis.U ndertheseassumptions,theconsumersurplus,
producersurplus and thetari®revenuearegiven by thefollowing:
1
2
[A + q¡t]
8
1
2
P S (t) = q[A ¡q+ t]
2
T R (t) = t[A ¡q¡t]
C S (t) =
T hesocialwelfareis again thesum ofthesethreeterms:
W (t)= C S (t)+ P S (t)+ T R (t)
H owever,thesociallyoptimaltari®is nolongerzerosincethecountrycan a®ecttheworld prices.
M orespeci¯cally,sociallyoptimaltari®is given by
ts = argmaxW (t)=
t
A ¡q
3
(9)
Similarly,theobjectivefunctionofthegovernmentisthesum ofthesocialwelfareandthemonetary
contributions G (t;C )= ®W (t)+ C and the lobby'
s objective function is the producersurplus
minus the contributions L (t;C )= P S (t)¡C .T he equilibrium tari®s underperfectinformation
willmaximizethe jointwelfareofthelobby group and thegovernment.T he contributions again
areused todistributetheexcess jointsurplus compared tots.T his tari®levelis given by
tj = argmax®W (t)+ P S (t)=
A
q(2 ¡® )
+
3
3®
A s expected, the jointly optimaltari®levelis always higherthan the socially optimalone since
tj = ts +
2q
ormation, the lobby would ask forthe tari®leveltj and o®erthe
3® .underperfectinf
contributionC j thatwouldleavethegovernmentindi®erentbetweenthis proposalandthesocially
optimaltari®:C j = ® [W (ts)¡W (tj)]
.
W e willintroduce asymmetric information through the lobby type as we did in the previous
section.H owever,weshouldnotethatthesociallyoptimaltari®,ts,nowdepends onthetypeofthe
lobbygroup as seen in expression [9]
.T helobbycan beofhigh (low)type,qh (ql)with probability
p(1 ¡p).
17
T heanalysis willbealmostidenticaltotheprevioussectionwiththesmallcountry.T hesocially
optimaltari®is denotedbyths (tls)whenthelobby'
s typeis high(low).W henthequantitysupplied
is higher,theoptimaltari®willbelower:ths < tls T hesepoints canbeseeningraph[3]
.G h (G l)is
thegovernment'
s indi®erencecurvegoingthroughthesociallyoptimaltari®(andzerocontribution)
pointwhen thelobby is high (low)type.L
h
(L l)is the indi®erencecurve forthehigh (low)type
going through the jointly optimal tari®/contribution point H (L )that would be chosen under
perfectinformation.T heobjectivefunctionofthelobbystillsatis¯es thesinglecrossingcondition.
T hestructure ofthe signallinggameis identicaltotheprevious case.T helobby group makes
an o®erthatincludes acontribution in return forahighertari®rateand thegovernmentdecides
toacceptorreject.T he lowtype willneverwanttoimitate the high type as can be seen in the
graph.T he perfectinformation outcome ofthe lowtype, L , is more attractive forthe high type
compared toherown outcome H.T herefore, in equilibrium the lowtype willnevero®erL since
thehightypewoulddothesamethingcausingthegovernmenttorejectbothtypes'o®ers.instead,
the low type willo®erpointE which makes the high type indi®erentbetween this o®erand H
causinghertoo®erherperfectinformationoutcomes.T hegovernments willacceptsinceE lies on
its indi®erencecurve.O fcourse,thelowtypeis worseo®.T osummarizetheresults:
P roposition 4 : T he following strategies form a perfectB ayesian equilibrium of the signalling
game andsatisfythe intuitive criterion:T he high type o®ers H,herperfectinformation outcome.
T he lowtype o®ers E which is worse than his perfectinformation outcome L .T he government
accepts both o®ers.
T heequilibrium outcomedidnotchangeevenwhenthesociallyoptimalpolicydepends on the
private information ofthe lobby groups. Itis qualitatively identicalto the previous case where
theprivateinformation is completelyrevealed tothegovernmentthrough theo®ers sincedi®erent
types can crediblysignaltheirtypes.A gain,when thelobbyis alowtype,theequilibrium tari®is
lowerthan theperfectinformation outcomewhich bene¯ts thesociety.
A notherinteresting question is whetherthe presence ofthe lobbies actually improves welfare
comparedtotheenvironmentwherethegovernmentimplements policies underuncertainty.W ithoutperfectinformation on q, the governmentwillchoose the tari®thatmaximizes the expected
18
socialwelfare:
t¤ = argmaxpW
³ ´
³
´
t;ql + [1 ¡p]W t;qh
= ptls + (1 ¡p)ths
W hen this tari®is implemented, overallwelfare willbe equalto pW
¡ ¤ l¢
¡
¢
t ;q + [1 ¡p]W t¤;qh .
W hen thelobbies areallowed tooperate,thj (tE)willbeimplemented ifthetypeis high (low)and
³
´
¡
¢
the expected socialwelfare is pW tE;ql + [1 ¡p]W thj;qh . W e know thattls > ths , thj > ths ,
tlj > tls and ths < t¤ < tls . Since ® < 1 , we willalso have thj > tls. T hus the ordering willbe
the following: thj > tlj > tE > tls > t¤ > ths . Since the socialwelfare function is concave with a
maximum valueatts,thesocietywillalways beworseo®underthelobbyinggame.Itis truethat
thelobbies providevaluableinformation tothegovernment,butthatis onlyused toincreasetheir
jointsurplus attheexpenseofthesociety,nottoimproveits welfare.
6 O ther Lob b yingAc tivities
In this section,as wedid previously,wewillanalyzetheequilibrium outcomewhen thelobbies are
abletoengagein costlyactivities,otherthan monetarycontributions.T henewobjectivefunction
ofthelobbygroup is given by
L (t;P ;C ;q)= P S (t;q)¡Z (P ;q)¡C
and the structureofthe gameis the same as described forasmallcountry.T he lobby decides to
engageinthecostlynon-contributoryactivitiesP whichisobservedbythegovernmentwhoupdates
its beliefs.T hen the lobby makes its contribution o®erin return fora tari®and the government
decides toacceptorreject.IfP = 0 ,then the equilibrium strategies forthe restofthe game are
theones described in theprevious section.H igh typeknows thatitwillobtain its ¯rst-bestpayo®
and has noincentivetoimplementpositive P ifthelowtype implements P = 0 as well.T helow
typewouldliketosignalhertypecrediblyin this stagesohecanproposetl;C l inthesecondstage
instead oftE;C E withoutworrying abouthigh type imitating him. A gain, we come across the
sameproblem as before.A nysignalP thatwould besentbythelowtypecan alsobesentbythe
high type atalowercost.T he lowtypecan credibly signalhertypeifand only ifZ
19
Pq (P
;q)< 0
which makes the unrealisticassertion thatthe marginalcostofengaging in lobbying activities is
lowerforthelowtype.Inconclusion,neithertypewillagainengageinnon-contributoryactivities.
T henextissueis iftheseconclusions would changeifthelobbycould committonotproviding
any monetary contributions in a laterstage.Suppose this credible commitmentis undertaken at
theverybeginningofthegameandthegovernmentobservesthis commitment.Iftherearenoother
lobbyingactivities available,thegovernmentwillsimplymaximizetheexpected socialwelfareand
implementt¤ (as de¯ned above)whereths < t¤ < tls.T hegovernmentwould de¯nitely liketo¯nd
outthetruevalueofqsoitcan implementtheoptimaltari®.In theabsenceofcontributions,the
hightypeknows thatths willbeimplementedifhereveals hertypewhichis worseforhercompared
tot¤.O n the otherhand, the lowtype is bettero®underperfectinformation and would like to
convey hertrue type.Furthermore, the high type would like the governmenttobelieve thather
typeislowsinceitwouldimplyanevenhighertari®.A separatingequilibriacanneverbesustained
since the high type has the incentive toimitate actions ofthe lowtype and the lowtype has no
crediblemechanism torevealhertype.Sincenonon-contributoryactions P willbeimplemented,
both types oflobbies willnowwanttomakemonetarycontributions.T hepayo®s atH and E are
higherthan (t¤;0 )forboth types.T herefore, commitmenttonotmakingmonetary contributions
can neverbecredible.
T he conclusion from this section is identicaltothe previous one despite the factthatthe sociallye±cientpolicy depends cruciallyon theinformation possessed by thelobby.In equilibrium,
onlymonetary contributions willbeused sincethey arethemoste±cientmechanisms tocredibly
transmitthe information while compensatingthe governmentforthe distortion in socialwelfare.
Contribution is e±cientbecausethepayo®functionofthelobbysatis¯es thesingle-crossingconditionbetweentheinformationparameterqandthepolicyparametert.T helobbydoes notimprove
socialwelfare since the distortion caused by the collusion between the lobby and the government
always leads toaworsepolicy.W ewillalsoneverobserveotherforms oflobbyingactivities since
the information can notbe transmitted credibly given the assumptions aboutthe cost ofthese
activities.Furthermore,thelobbies can nevercredibly committonotusingcontributions since it
willalways bein theirinteresttodoso.
20
7 Dem and U ncertain
ty
W e have shown that under a wide variety of scenarios, neither type of lobby will ever employ
non-monetary activities.H owever,as westated earlier,directmonetary contributions areasmall
portion ofthe expenses incurred by the lobby groups which implies we have so farfailed atour
objectivetoexplaintheconditions thatwouldleadtothis empiricalregularity.W ewillnowextend
the modeltoa scenariowhich would accountforthis type ofactivities.W e willassume thatthe
uncertainty is aboutthe demand parameterA ratherthan the supply parameterq. T he lobby
knows the true value of this parameterbut the government only knows that it is A l(A h )with
probabilityp(1 ¡p).
In the small country case, the socially optimal tari® (t = 0 )and the jointly optimal tari®
tj = q=® (given by equation [3]when ¯ = 0 )do not depend on A . T herefore, the strategic
interaction between the governmentand the lobby is straightforward.B oth types oflobbies will
o®erthe same contribution C j = 12 ®t2j in return forthe same tari®tj = q=® and the government
willaccept.A gain thelobbygroups,willhavenoincentivetouse otheractivities,P ,sinceitwill
havenoimpactonthenextstage.A lso,theywillneveragreetobancontributions sincetheywould
beworseo®underfreetrade.
Ifthecountry is large,thesocially optimaltari®is given by ts = A¡q
3 and the jointly optimal
tari®is given by tj =
1
2 q[A
A
3
+
q(2 ¡® )
3® .T
he payo®forthe lobby group is L (t;C )= P S (t;A )¡C =
2
@ L
¡q+ t]¡C .Inthis casethesinglecrossingconditionis notsatis¯edsince @t
d A = 0 .T his has
signi¯cantimplications forthesignallinggamesincethelobbies cannotcrediblyrevealtheirtypes
tothegovernment.Inotherwords,therearenopairs oftari®s andcontributions thatwouldjointly
satisfy the incentive compatibility constraints stated in equations [??]and [6]
.In the absence of
politicalcontributions thegovernmentwillchoosethetari®levelthatwillmaximizeexpectedsocial
welfare:
t¤
gmaxpW
s = ar
t
³
´
³
´
pA l + [1 ¡p]A h ¡q
t;A l + [1 ¡p]W t;A h = ptls + [1 ¡p]ths =
3
where tls < tas < ths .A proposaltoimplementtari®t would lead tothe followingdecrease in the
21
governmentwelfarewhich needs tobecompensated by thecontribution:
h ³
´
³
´i
h ³
´
³
´i
u
l
l
¤ h
h
Cj
= ®p W t¤
;
A
¡W
t
;
A
+
®
[1
¡p]
W
t
;
A
¡W
t
;
A
s
s
h
i
2
1
® pA l + (1 ¡p)A h ¡q¡3t
=
24
(1 0 )
T helobbygroups payo®is given by
i2
1 h
1
L (t;C ;A )= P S (t;A )¡C j = q[A ¡q+ t]¡ ® pA l + (1 ¡p)A h ¡q¡3t
2
24
T hetari®thatmaximizes this expression is
£
¤
® pA l + (1 ¡p)A h + (2 ¡®)q
u
tj =
3®
In equilibrium, both types oflobbies willo®erthe above tari®tj in return forthe contribution
C j given in equation [1 0 ]and thegovernmentwillaccept.T hegain foreach lobby is P S (t¤
s;A )¡
£
¤
compared tothetari®t¤
P S (tj;A )= 21 q2 1¡®
s.
®
T he inability to separate themselves in equilibrium is the reason why the lobbies willengage
inothernon-contributoryactivities.R ecallthatthetari®s implemented underperfectinformation
Ah ® + (2 ¡® )q
3®
l
and tlj = A ® +3(2® ¡® )q forthe high and the low types respectively while the
£
¤
£
¤
h = 1 ® A h ¡q¡3t 2 andC l = 1 ® A l ¡q¡3t 2 .T heequilibrium outcomes
contributions areC j
j
24
24
are thj =
u
of the imperfect information game, C j
and tu
ype. T he gain for
j are ine±cient for the high t
¡
¢
herfrom implementingherperfectinformation policies is 16qp A h ¡A l .O n the otherhand, the
¡
¢
1
perfectinformation outcomewould decreasethelowtype'
s payo®by 6
q(1 ¡p) A h ¡A l .in this
situation, thehigh type would like tosignalhertype whilethe lowtypeis happy with the status
quo.
W hen we allowotherlobbyingactivities anewequilibrium can be implemented.Forthe moment,assume thattherearenocontributions allowed.Ifthedomesticdemand is high (A h ),then
the socially optimaltari®is higherthan the one implemented by the government underuncertainty. T hen the high type willaim to signalhertrue type since itcan obtain a higherpayo®:
¡ ¢
L ths ;0 > L (t¤
y tosend the same signalsincehis payo®is
s;0 )H owever,thelowtype willalsotr
increasingin the tari®rate.Forthegovernmenttoimplementths ,thesignalneeds tobecredible.
R ecallthatthecostfunction forotherlobbyingactivities Z (P ;A )satis¯es thesingle-crossingcon2
@ Z
dition @P
@A < 0 which meantthatthemarginalcostofengagingin non-monetaryactivities needs
22
tobedecreasinginA .W henthis happens,thehightypecanengageinhigherlevelofP thatwould
crediblysignaltothegovernmentthetruestateoftheworld.
T hispropositionprovidestheconditionsunderwhichwewillobservenon-contributoryactivities.
First,thepayo®functionforthelobbyP S (t;A )should notsatisfythesinglecrossingconditionso
thatthe contributions can notbe used as signals.Second, costfunction forotheractivities need
to satisfy the single-crossing condition so thatthe type can be truthfully revealed through such
actions.Furthermore, ifthe monetary contributions are available, the governmentand the lobby
cancollaboratefurther.T helobbywouldo®erC jinreturnforthetari®tjwhichwouldbeaccepted
sincetheinformation has alreadybeen revealed.T his would implythatlobbygroups would again
nevercommit to banning contributions. W e had stated that contributions serve signalling and
distributionalpurposes. A lthough they can notful¯llthe ¯rstfunction, since contributions can
stillservetodistributethegains from sociallyine±cientpolicies.W ecan summarizetheresults:
P roposition 5 : Suppose the non-contributory politicalactivities satisfy the single-crossingcondition.T hen eitherboth types oflobbies (oratleastthe high)type willengage in such activities to
crediblysignalhertype to the government.T he governmentthen implements the proposedoptimal
tari®thj (ortlj).
Itis naturaltoaskwhatkinds ofcostfunctions Z (P ;A )satisfythesecriteria.Ifwelookatthe
payo®fortheconsumers,wenoticethattheirpayo®is alsoincreasinginA althoughitis decreasing
int.Ifthelobbygroups representingtheproducers couldmobilizetheconsumers (whoalsoreceive
the tari®revenue), forexample, this would be a very powerfulsignal. U ndercertain restriction
on therelative values ofqand A h ,theconsumers would prefertohaveths implemented compared
to t¤
i® revenue. If
s since the loss in consumersurplus is easily made up by the increase in tar
the consumers demand a highertari®(through theire-mails and letters), the governmentwillbe
convinced abouttheclaims ofahigherA .
T he cooperation between the lobby group and the consumer can create another interesting
outcome.Ifthemonetarycontributionsarepossible,theequilibrium tari®ishigherthanthesocially
e±cientoutcome although the lobby group is indi®erentsince the governmentextracts allofthe
surplus.In the presence ofcontribution, the governmentimplements t¤
j=
23
pAl+ [1¡p]Ah
3
+
Q d (2 ¡® )
3®
h
with nosignallingand thj = A3 +
Q d (2 ¡® )
3®
with signallingwherethj > taj.T hechange in consumer
surplus and tari®revenuefrom thesetwooutcomes is given by
³
´
³ ´
³ ´
ih
i
¡ ¤¢
¡ ¤¢
1 hh
h
h
¤
h
h
¤
£ thj;t¤
=
C
S
t
+
T
R
t
¡C
S
t
¡T
R
t
¡=
t
¡t
¡
6A
+
1
0
Q
+
7
t
+
7
t
d
j
j
j
j
j
j
j
8 j j
l
h ¡Q
pA + [1¡p]A
Ifmonetarycontributions arebanned,then thegovernmentimplements t¤
s=
3
itis uncertain aboutA and implements ths =
Ah ¡Q
3
d
d
when
when A is known.T he change in consumer
welfareis given by
³
´
³ ´
³ ´
ih
i
1 hh
h
h
¤
¤
a
h
h
¤
£ ths ;t¤
=
C
S
t
+
T
R
t
¡C
S
(
t
)¡T
R
(
t
)
¡=
t
¡t
¡
6A
+
1
0
Q
+
7
t
+
7
t
d
s
s
s
s
s
s
s
s
8 s
³
´
³ ´
¡
¢
¡h ¢
¡h ¢
h ¤
h
A ftersomealgebra,wecan showthat£ ths ;t¤
s > £ tj;tj and C S ts + T R ts > C S tj +
³ ´
T R thj .T heconsumers prefertheoutcomes wherethegovernmentandthelobbycannotcollude
and extractrents atthe theirexpense.A commitmenttowards notusingmonetary contributions
can bepowerfultooltoconvincetheconsumers totakeactions tosignaltrueA tothegovernment
since it provides a higher payo® to the consumers. Since the its payo® is same regardless of
whethertherearecontributions ornot,thelobbymight¯nd itin its interesttocommitnottouse
contributions toconvincetheconsumers toact jointly.T hus,the¯nalresultofthepaperbecomes
thefollowingproposition.
P roposition 6 :Suppose the lobbycan committonotusingmonetarycontributions andthe con¡
¢
ds
sumers are notorganizedintolobbygroups buttheyare identical.A lsoassume £ ths ;t¤
s > 0 hol
which means each individualconsumer is better o® under the policy implemented under perfect
information.If the demandparameteris A h ,then the lobbywillcommitnotuse monetarycontributions andthe consumers andlobbywillcoordinatetheiractivities tocrediblysignalthe true value
ofA .T he governmentwillimplementths .
8
Concl
usions
T herearetwoimportantobservations aboutthelobbyingprocess.First,itoperates underaheavy
cloud ofuncertainty and asymmetric information and second itmostly involves non-contributory
24
activities.A lthough theinformationalroleoflobbyinghas been somewhataddressed in theliterature,thesecondpointreceives noattention.O uraim is toanalyzestrategicissues thatarisewhen
lobbying is done underasymmetric information and more importantly, determine which factors
lead thelobbygroups tochooseotheractivities overdirectcontributions.
T hemostimportantconclusion ofthepaperis thesigni¯canceofthesingle-crossingcondition
whichisnecessaryforcredibleinformationrevelationandexistenceofseparatingequilibrium.W hen
the payo®function ofthe lobby groups satis¯es single-crossing between the type and the policy
parameter, lobbies willalways use monetary contributions and neveruse otheractivities.T his is
trueregardless ofwhetherthesociallye±cientpolicydepends on this parameterornot.M onetary
contributions,puttingyoumoneywhereyou mouthis,is themoste±cientmechanism totransmit
information credibly.non-contributory activities, on the hand, willonly be used when the payo®
function does not satisfy single-crossing and when the socially optimal policy depends on the
information parameter. of course, the cost function of these activities needs to satisfy singlecrossingbetween typeand intensityoflobbyingforcrediblesignaling.
W e presented ourresults in a series oftrade policy models, butthey can be easily extended
toothersettings.Forexample,supposethepolicy in question is agriculturalsubsidies,wherethe
optimalpolicyis zerosubsidy.T heninequilibrium,weshouldexpectonlymonetarycontributions.
O ntheotherhand,ifthepolicyinquestioninvolves optimum degreeofenvironmentalsafetywhere
thepayo®functions mightbedownwardslopingafteralevelandtheoptimalpolicyis notperfectly
known,weshould expecttoseemorenon-contributorylobbying.
T here are severalobvious shortcomings ofthe paper. T he ¯rstis the absence multiple and
presumablyopposinglobbies.T his mightprovidemotivations forintentionalrestrictions on direct
contributionssincethegamebecomesaP risoners'D ilemmagamewherethegovernmentextractsall
surplus.Second thetypeofnon-contributoryactivities mightenablethelobbytogetorganized in
the¯rstplace.P eoplewithcommoninterestmightbemoreeasilyconvincedtowritealettertotheir
congressman,ratherthan makingacontribution tothe lobby which willpass iton the politician.
In otherwords, the nature ofnon-contributory activities mightsolve the free-riding problems in
lobbies.R atherthandiscouragement,wehopetheseshortcomings willprovidemotivationforother
papers.
25
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