Interest Groups and Public Policy - National Chung Cheng ...

Interest Groups and Public Policy - National Chung Cheng ...

Interest Groups and Public Po licy Yu-Bong Lai Dept. of Public Finance National Chengchi University Normative approach to public policy First-best world

The social welfare is maximized subj ect only to the economys resource a nd technology constraints. The fundamental theorems of welfare economics establish a link between t he Bergson-Samuelson tradition and the positive competitive equilibrium t heory.

Normative approach to public policy Implication Perfect markets and perfect governments do an equally good job of achieving efficiency. Role of the government

correct market failure Normative approach to public policy Second-best world Policy analysis includes additional con straints. Ex. optimal taxation theory; revised Samuel

son rule Normative approach to public policy The normative approach assumes that on ce an optimal policy has been found, it wil l be implemented as designed. This approach views the political process

as a social-welfare-maximizing black box. Analogy: The neoclassical theory views th e firm as a profit-maximizing black box. Problem of the normative approach Who is the government? Methodological inconsistence The public choice approach proposes co

nsistency in the application of the princi ple of rationality Government failure Problems that arise when one actor in the economy (the state) monopolizes t he legitimate use of force.

Government failure Public policymaking is a political process. Involved agents: voters, bureaucrats, elected representatives , interest groups, and others. Each participant will try to manipulate the o

peration of the subsequent game , and then try to achieve an outcome that favors his ow n interests. Like what Becker said, I believe that voter preferences are freq uently not a crucial independent force in political behavior. These preferences ca n be manipulated and created through t

he information and mis-information provi ded by interested pressure groups . (Becker 1983) Example of interest groups Clean Coal/Dirty Air In 1977 Congress passed a set of Clean Air Act Amendments, including

one provision, Section 111, aimed at new sources of sulfur-oxide emissions. It requires the best available technology, but rather than requires the new plants meet a specific emission standard. Models of Special Interest Groups

Rent-seeking model Stigler-Peltzman model (or Chicago model) Becker model Common-agency model Renting Seeking Model Whose credit?

The idea of rent-seeking The expression rent-seeki was developed by Gor don Tullock in 1967. ng was coined in 1974 by Anne Krueger. Profit-seeking vs. rent-seeking

Definition of rent-seeking The political activity of individuals and gro ups who devote scarce resources to the p ursuit of monopoly rights granted by gove rnment. Incentives for rent seeking are present w henever decisions of others influence per

sonal outcomes or more broadly when res ources can be used to affect distributional outcomes. Harbergers triangle Welfare cost from monopoly The mainstream literature used the clas sic analysis of monopoly by Harberger

(1954) to measure "deadweight" losses of such public policies, ignoring how the y might have come to be adopted. Harbergers triangle Tullocks View If public policies are politically endog

enous, then part of the social cost of those policies was the use of scarce p ersonal abilities and resources in effor ts to influence policy decisions. Welfare cost and theft Transfers themselves cost society nothin g, but for the people engaging in them th ey are just like any other activity, and thi

s means large resources may be invest ed in attempting to make or prevent tran sfers. These largely offsetting commitme nts of resources are totally wasted from t he standpoint of society as a whole. (T ullock 1967) Unproductive expenditure

The quests for income and wealth redi stribution through public policy are co mparable to the activities of thieves, who also use personal resources and i nitiative in unproductive endeavors to redistribute, rather than create wealth .

Unproductive expenditure The act of theft results in an incom e transfer that does not change tot al national income, but social losses do arise before a theft takes place. The social loss from rent seeking si milarly occurs ex ante, through unp

roductively used resources and initi ative before policy decisions are ma de. Tullocks Rectangle Basic Rent Seeking Model Utility

is measured in monetary units. Utility function Since entry is free, the equilibrium con dition is Basic Rent Seeking Model Rent-seekers

expected income equals non-rent-seekers income In equilibrium, Basic Rent Seeking Model The value of rents generated by public policies can be used as a proxy for the resources used in rent seeking.

Complete rent dissipation Rent dissipation The early rent-seeking analyses sou ght accurate measures of social loss es from public policies and monopol y. Tullock, Krueger, and Posner argued

that the resources used to establish, maintain, or eliminate trade restricti ons and monopolies are part of the social cost of those policies, but had previously been neglected. Rent dissipation The idea that resources are unprod

uctively used in rent-seeking conte sts has much broader application th an the initial rent-seeking papers su ggested. The rent seeking logic has been app lied to issues in history, sociology, a nthropology, biology, and philosoph y.

Rent dissipation The core idea has also been formalize d and analyzed more rigorously, using the tools of modern game theory. The modern rent-seeking literature de scribes the rational decision to invest i n contesting pre-existing wealth or inc ome, rather than undertaking producti

ve activity. Stigler-Peltzman mod el or Chicago model Stigler-Peltzman model Does regulation actually serve the pu

blic interest? Traditional view: yes Chicago school: no Stigler-Peltzman model The state has a unique source: the pow er to coerce. Four policies that a group may seek of

the government (1) direct subsidy of money (2)entry barriers (3)substitutes and complements (4)price-fixing Stigler-Peltzman model Crucial elements in Stigler-Peltz

man model regulatory legislation redistributes we alth the regulator is driven by their his des ire to maximize political support interest groups offer political support i

n exchange for favorable policy. General results Regulation is likely to be biased towar d benefiting interest groups that are b etter organized. Regulation is likely to benefit small SI

Ps with strongly felt preferences at th e cost of large groups with weakly felt preferences. The model A regulator chooses a price so as to m

aximize his political support. The political support function : price ; : industry profit And also, Figure

According to the Figure, we know If the equilibrium price an industry would a chieve in the absence of regulation is close to the price that would exist under regulati on, then regulation is unlikely. This suggests that the industries most likel y to be regulated are those that are either r elatively monopolistic or relatively com

petitive. Critics of Stigler-Peltzman model Regulatory agencies are passive Fail to consider the competition among SIP Beckers Model

Beckers Model focuses on the competition among int erest groups. Two groups, group 1 and group 2. The wealth transfer that group 1 receive

s depends on both the pressure it exerts on the regulator () and the pressure exer ted by group 2 () Beckers Model Transfers received by group 1 are

is the influence function And also, The relative pressure does matter. Interaction function of two interest groups Beckers Model

In order to transfer T to group 1, grou p 2s wealth will be reduced by . Beckers Model What will happen when the marginal D WL increases?

Group 2 will increase its pressure. Group 1 will reduce its pressure. Result: the amount of regulatory activi ty will decrease. Marginal DWL increase Implications

Regulatory policies that are efficiency-im proving are more likely to be implement ed than ones that are not. Industries plagued by market failures (s o that the marginal DWL from regulation is low) are more likely to be regulated. Beckers model links the view that gover nments correct market failures to the vie

w that policies are shaped by the compe tition among SIPs. Critics of Beckers Model The regulator does not exist. A more general analysis would inco rporate this principal-agent relation b etween bureaucrats, politicians, and p

ressure groups into the determination of political equilibrium. (Becker 1983) Common-agency Model Common-agency model Breheim and Whinston (1986)

Menu auction, resource allocation, and economic influence, Quarterly Journal o f Economics 101, 1-31. Grossman and Helpman (1994) Protection for sale, American Economi c Review 84, 833-850. General model

An economy contains N groups of people. Only groups in the set L are groups that are organized to lobby the policymaker. Lobbying group offers the policymaker a co ntribution schedule , which is contingent on the vector of policy . Lobbying group j aims to maximize its net welfare, which is equal to its gross welfare,

, minus the political contributions. General model First stage: each lobbying group offers a contributi on schedule to the policymaker, given t he other groups contribution schedules .

Second stage: the policymaker maximizes his objectiv e function, which is a weighted average of the political contributions received a nd the social welfare. General model policymaker's

objective function: is weight the policymaker attaches to the poli tical contributions. General model By Grossman and Helpman (1994), the equilibri um policy (*) should satisfy the following conditi

ons: (1) * maximizes given the contribution schedule provided by the lobby ists, the policy-maker chooses t to maximize his own welfa re. (2) * maximizes equilibrium tax rate should maximize the joint welfar e of

the lobbyists and the policy-maker. General model (1) implies From (2), we know

(C1) (C2) General model Taken together, the two conditions e

nsure that (C3) The contribution schedule is locally tr uthful around the equilibrium t. General model

Inserting (C3) into (C1) gives

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