Reforms, lobbies and welfare: A common agency approach

Citizens with heterogeneous tastes delegate to policy makers the authority to choose public policies. They may try to influence legislators in various ways. In this paper we assume that monetary lobbying and direct threats are the only instruments private individuals can use to influence the legislator. We model the relationship between the citizens and a single policy maker as a common agency game. Lobbies offer a policy and a payment according to a truthful contribution schedule, and the government takes the policy decision. In the truthful equilibrium, the government implements the social surplus maximizing policy. Introducing also direct threats, we find that, as far as both groups have an instrument to influence the legislator, the efficiency result is robust. We also show that when the lobby groups have asymmetric interests and political power, not all groups necessarily participate in the auction. In particular it turns out that one-lobby or non-lobby equilibria may arise, and those equilibria are also efficient. Copyright Springer Science + Business Media, Inc. 2005