Political Agency and Legislative Subsidies with Imperfect Monitoring

Politicians are expected to implement projects that benefit their constituents. These projects’ benefits sometimes partially accrue to interest groups and not entirely to voters. Since these projects are costly to implement, this provides an incentive for interest groups to intervene in the policy-making process by offering legislative subsidies to politicians. In addition, voters are frequently ill-equipped to scrutinise politicians’ actions and can often only imperfectly monitor them. This paper shows how these considerations interact in a stylised two-periods political agency model with moral hazard and adverse selection. I show how and when voters benefit from the existence of self-interested interest groups and of their involvement in the policy-making process. I also consider how voters monitor politicians in the presence of interest groups that might capture projects’ benefits.