Policy Reform and the Free-Rider Problem
We investigate policy reform in a model with both lobbying, which involves a free-rider problem, and ordinary rent seeking, which does not. These activities involve similar skills, so a reform which reduces rents shifts labor into lobbying. Also, because of the free-rider problem, the marginal return to the industry from lobbying may greatly exceed an individual firm's return to lobbying. Thus, the shift into lobbying caused by rent reduction may lead to large increases in transfers to the lobbying industry. Under some circumstances, a reform which reduces available rents increases total rents plus transfers to the industry.
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