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The Design of Incentives in the Presence of Lobbying Activity

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  • Joachim H. Wessels
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    Abstract

    The effects of unproductive lobbying have so far mainly been addressed by the public choice literature on rent-seeking and by Milgrom/Roberts' (1988,1990) work on influence activities in organizations. Our paper makes an attempt to incorporate lobbying into the simple principal-agent framework that was proposed by Holmstr'm/Milgrom (1991). This framework has been used by Itoh (1992) to analyze the costs and benefits of relative performance evaluation (RPE), a method of pay that can reduce agency costs by inducing competition between agents. One of Itoh's main findings is that the principal may prefer the agents to cooperate if there exist productive interactions that cause sabotage under a system of RPE. In our model, each of the two agents can affect the output signal that determines his pay both by productive effort and by unproductive lobbying that makes his performance appear better. We show first that the presence of lobbying leads to lower-powered incentives in the optimal contract. Secondly, complementing Itoh's findings, we conclude that even if there are no productive interactions between agents, RPE may be non-optimal, because its use would provide the agents with an additional incentive to engage in lobbying. In this case, the principal will instead create a positive interdependence between agents' income (a kind of implicit teamwork) to reduce the attractiveness of lobbying.

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    Bibliographic Info

    Paper provided by University of Bonn, Germany in its series Discussion Paper Serie A with number 489.

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    Length: 25 pages
    Date of creation: Aug 1995
    Date of revision:
    Handle: RePEc:bon:bonsfa:489

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    Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
    Fax: +49 228 73 6884
    Web page: http://www.bgse.uni-bonn.de

    Related research

    Keywords: lobbying; rent-seeking; principal/agent theory; incentives; relative performance evaluation;

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