Matteo Marcantognini Palacios

MFIESA2009

Olsons Collective Action Problem 1965-1982

Propositions:
Profitable rent seeking is most likely in industries with a high degree of concentration and almost
impossible among consumer groups
The typical constrained maximization approach requires both an objective (in this case, social welfare)
and a constraint (here, the capacity of society to produce goods and services from which its citizens
derive benefits)
Interest Groups in individual rational pursuit of their own interest can in effect throttle the system,
reducing its vitality and restricting the menu of social choice of everyone else
The universal pursuit of political advantage leads to such perverse results as import quotas, fuel
allocations, legalized monopolies, licenses, and fixed prices, all of which are designed to redistribute
rents from unorganized groups (consumer and taxpayers) to organized groups
Predictions and Prescriptions:
Not only powerful interest groups organize but such organization retards economic growth and their
self interests are inimical to the public and general good
The better a polity performs its task of representing the economic interests of organized groups, the
worse it may be at managing its economy
Make the public aware of ill effects from interests and rent seeking and restore free markets
Critiques:
Adifficulty of the whole approach is Olsons treatment of rent seeking as a pure demand phenomenon,
leaving out the powerful role of the government
North issues a challenge to develop a theory of the state in which the state is accorded a preeminent
role
Matteo Marcantognini Palacios
MFIESA2009
Olsons Model of Welfare Losses
Intuitive Analysis
The two axes represent the utility of two
groups A and B
PP represents the production
possibilities curve
I I represents the social indifference
curve
The initial optimal and efficient
condition is the social choice
represented by point g
If other interest group C is able to reach
a rent transfer harming groups A and B,
their utilities will be diminished in a
magnitude that exceeds the gain to C
It results in a lower production
possibilities curve PP and a lower
social indifference curve II implying a
new Pareto Optimality condition of
social choice represented by point g
There has been a welfare loss affecting
the entire society: voters (consumers)
and interest groups (producers)
Matteo Marcantognini Palacios
MFIESA2009
The Chicago Model: Stigler, Posner, Barro, Peltzman
1962-1976
Propositions:
Government is the supplier of regulatory services and the regulated industry itself is the source
of demand for regulation, not the public interest
In exchange, the regulated industry can offer legislators campaign contributions, votes of
employees and can promise highly remunerative employment to the regulators
The source of the principal-agent model conflict rests solely on the divergence of utility incomes
arising from overproduction of government services and paid for by taxes on all citizens
The major political problem for regulators is to design efficient regulation
Predictions and Prescriptions:
The question this theory suggests is how to design institutions to arrest or at least control the
tendency of regulation to grow solely for the mutual benefit of regulator and regulated
The goal is to prevent legislators from succumbing to the blandishments of interest groups for
personal monetary gain
Regulators must respond to demands of consumers as well as the regulated
Critiques:
The theory cannot predict precisely which industries will be regulated, does not explain
deregulation, and its chief predictions are either tautological or are not borne out empirically
The theory asserts a strangely passive pattern of behavior by regulatory agencies in the face of
significant opportunities to do better
Matteo Marcantognini Palacios
MFIESA2009
The Chicago Model: Vote Maximization
and Government Choices
Intuitive Analysis
M
1
, M
2
and M
3
are the isovote curves (M
1
represents more votes than M
2
, and so on)
PP is the potential profit curve, the
function that represents the rent interest
of industries
Combination T is chosen by a vote
maximizing regulator, with observed price
P
2
between monopoly price P* and the
efficient price P
1
If the industry improves its costs there
may be a shift in the potential profit curve
to PP that should lead regulators to select
combination K, associated with the lower
and efficient price P
1
, a Pareto superior
move since consumers pay lower prices,
the industry obtains higher profits, and
the regulators gain more support from
each group than would be obtained at T
Matteo Marcantognini Palacios
MFIESA2009
Interest Groups and Rent Seeking: The Virginians
Buchanan, Tullock, Krueger, Tollison, McCormick, Shuggart, Crain, Anderson, 1962-1988
Propositions:
Interest Group Theory of Government and The Demand and Supply of Wealth Transfers:
government output and growth are driven by the benefits and costs that citizens confront in using the
machinery of government to increase their wealth
Rent seeking is for individualsa highly rational and predictable political choice
Rent seeking is usually defined as the political activity of individuals and groups who devote scarce
resources to the pursuit of monopoly rights granted by governments
The basic propositions of rent-seeking theory are (1) that the expenditure of resources to gain a
transfer is itself a social cost and that (2) the resulting market privileges or rents represent a loss on
consumers and taxpayers
Predictions and Prescriptions:
The intensity with which rents are sought by citizens or officials depends on the size of the rents and
the number of prospective competitors
Political efficiency and economic efficiency are much more likely to conflict rather than coincide: self-
regarding activities of special groups generally cannot be balanced by encouraging more to be
organized worsening rather than improving the situation
The only means to reduce wasteful rent seeking is to deny government actors the capacity to create
rents in the first place through constitutional prescriptions
Critiques:
Orthodox advocates of interest group liberalism have argued that valuable information services
provided by interest groups outweigh their significant distortions of the market and continued
exploitation of consumer and taxpayer
According to them, the formation of interest organizations is merely the most efficient means of
ensuring that all voices are heard
Matteo Marcantognini Palacios
MFIESA2009
Rent and Rent Seeking: A Virginian Primer
Intuitive Analysis
Propositions of rent-seeking theory are
succinctly depicted by this figure
derived from Harberger, where triangle
ABC constitutes the social welfare loss
while the box P
m
P
c
AB describes the
magnitude of the transfer of wealth
from the consumers to the rent seeker
Gordon Tullock considers that the latter
rectangle constitutes a waste so that the
total loss to society is the entire
trapezoid
These losses exceed the gains that might
have been obtained by the rent seekers
Matteo Marcantognini Palacios
MFIESA2009
The Budgetary Vote Calculus
Intuitive Analysis
The goal is to balance votes won for
each dollar spent against votes to be lost
by new taxation and regulation
In Panel A the marginal votegains from
two different expenditures E
A
E
B
must
be equal and the dotted horizontal line
represents the equality MVG
A
=MVG
B
of
vote gain of the two budgetary functions
Similar logic is depicted in Panel B, with
taxes T
A
T
B
and the marginal votes lost
MVL
A
=MVL
B
If the budget (E
*
A
+E
*
B
) = (T
*
A
+T
*
B
)
remains balanced, MVG* =MVL*
This is very different, however, from
saying E
*
A
=T
*
A
andE
*
B
=T
*
B
While relatively little empirical work
has been done to test this basic vote
calculus, observed behavior appears
consistent with this analysis
Matteo Marcantognini Palacios
MFIESA2009
Politics of Welfare Improvements
Intuitive Analysis
Suppose two parties are on the frontier
at P, a Pareto optimal position
Then suppose that B is able to have a
rent-creating proposal (tax exemption)
enacted that increases Bs income while
reducing that of A by a still larger
amount
If A can also obtain rent legislation
(subsidy), it is possible that a new
distribution will occur at E
If so, it is now possible for A and B to
improve their respective incomes by
agreeing to remove their sources of
unequal gain and make a Pareto move
back to P
Both B and E are inferior positions
because they enable both to be better off
on or near the frontier
Matteo Marcantognini Palacios
MFIESA2009
Graphics of Income Tax Reform
Intuitive Analysis
The demand for tax privileges is
assumed to be fixed and described by
curve DD, while the supply offered by
legislators is determined by statute
Before a tax reform act, S
1
the amount
of privileges is extremely generous but
inelastic
In order to change the quantity
supplied, it is necessary to pass a whole
new regime to shift the supply curve left
to S
2
This reduction in privileges increases
their political value at the margin,
resulting in intensified lobbying and
leading to a slow shift of the supply
curve back toward S
1
Political rent races can be reduced in
frequency and magnitude once we
recognize the role of government as the
constitutional supplier of rents
Matteo Marcantognini Palacios
MFIESA2009
Chicago (Reprise): Variations on the Theme 1978-1985
Propositions:
Beckers model relies on the tools of general equilibrium and the real insight is that self interest
dictates inefficiency and that waste cannot be an equilibrium phenomenon in the market with or
without government intervention
The Becker model is further constrained by the important assumption that rent seeking is
conducted under zero-sum conditions: expenditures must be balanced by tax revenues
Groups that are more efficient, relative to other groups, are able to reduce their taxes or raise
their subsidies in such a manner that increases in deadweight costs may result
Important Inequality: the larger the deadweight/efficiency loss of a proposal, the more losers
lose compared to what gainers gain
Predictions and Prescriptions:
In the limit (and in analogy with Coase Theorem) if organization and transaction costs are zero,
only efficient policies will be enacted because politics that decrease inefficient rents will be
politically popular
Competitive process among pressure groups favors efficient methods of taxation and
inducement to organize is a form of countervailing power that limits the power of pressure
groups
The greater the number of interest groups, and the more balanced the competition among them,
the more efficient are political outcomes
Critiques:
Virginians reject the most important result in Beckers analysis even if it is better able to explain
the movement toward deregulation
The view that pressure groups maximize members income is rejected by political scientists
Matteo Marcantognini Palacios
MFIESA2009
Lobbying: Group Reaction Curves and Equilibrium
Intuitive Analysis
The political pressure exerted by each
group is represented by an influence
function that depends on the number of
members and total political expenditures
The rent contest is a Cournot-Nash game,
where each group takes as given the
political efforts of other groups
MM is the reaction function of
manufactures and FF is the one of farmers
Farmers employ lobbying resources L
0
f
in
order to increase tariffs
Then manufacturers respond by choosing
point P
0
on their reaction curve and
increase their lobbying to L
1
m
This induces farmers to increase their
effort to L
1
f
and so on
A stable equilibrium at P* is the final result
and the only position at which the groups
actions are consistent with each other
Matteo Marcantognini Palacios
MFIESA2009
Interest Groups in Equilibrium Models of the Policy Process
Uri Ben-Zion et al (1974-75): Positive model of interest group influence on a
legislators policy platform; there is a conflict between serving ones
geographic constituency for votes and serving interest groups in exchange for
money needed to campaign and win those votes; the additional electoral
return from more funds is precisely offset by the electoral loss of votes
Denzau and Munger (1986): An institutional approach where, (1) interest
groups have less impact on issues where voters are well informed; (2)
legislators choose committee assignments based on constituents interest in
that committees jurisdiction; (3) committees possess monopoly proposal and
gate-keeping power over legislation in the Congress
Austen-Smith (1987): The most advanced research that pursues the modeling
of political agents and presents a truly formal equilibrium treatment of
legislators and interest groups in a democratic setting; voter preferences
influence the effective capacity of interests to exert political pressure; voters
perceive candidates only imperfectly, thus, campaign funds are used to
clarify and reinforce the candidates message, and candidates compete with
respect to their abilities firmly to establish their positions in voters mind
Matteo Marcantognini Palacios
MFIESA2009
Conclusions: Strengths and Weaknesses of the
economic approach to the study of interest groups
The strengths of the economic approach are its ability to provide us with
considerable insight into the process of group formation and maintenance
The economic approach provides predictions about what are the likely
outcomes of democratic politics, and how groups shape the process
Groups are collections of individuals, who join and participate (or free ride)
for individual reasons
We cannot treat groups as organic entities, and any theory whose normative
implications rest on such an assumption (as the pluralists did) must be
critically reexamined
Regarding the weaknesses of the economic approach, these models are
abstract and formal, they may well leave out components of group formation,
goal setting, and maintenance that are not mere details but are integral parts
of the political process
Matteo Marcantognini Palacios
MFIESA2009