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A General Theory of Rent-Seeking

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 A General Theory of Rent-Seeking

R. Kenneth Godwin*
Marshall Rauch Distinguished Professor
Department of Political Science
University of North Carolina Charlotte
godwink@email.uncc.edu

Edward J. López
Assistant Professor
Department of Economics
San José State University
edwardjlopez@gmail.com

Barry J. Seldon
Professor of Economics
School of Social Sciences
The University of Texas at Dallas
seldon@utdallas.edu

Abstract
How do firms allocate their lobbying resources among their political goals? We approach this
question using a game-theoretic model that integrates three concepts from the lobbying literature:
the distinction between private and collective rents, the level of competition, and the impacts of
political institutions. The model demonstrates how rent competition and political institutions
affect optimal lobbying expenditures and net expected returns (profits) for private and collective
lobbying. We demonstrate the model’s predictions using a series of examples, and we test the
model using interviews with 63 lobbyists for Fortune 1000 companies.
 A General Theory of Rent-Seeking

How do organizations select their political objectives and allocate resources among them? When do

organizations join lobbying coalitions versus working alone? How do competition and political

institutions influence these decisions? Despite the centrality of these questions to understanding lobbying,

prior research has not explored their implications within a single framework.

This paper provides such a framework using a game-theoretic model that applies to lobbying by

firms at all levels and branches of government and addresses how interests select goals, allocate

resources, and choose lobbying strategies. The model integrates three interrelated concepts: the impact

of political institutions on the availability of rents; the degree of competition over rents; and, the

distinction between private and collective rents. By demonstrating how political institutions and

competition affect equilibrium lobbying expenditures and expected net returns, the model shows when a

profit-maximizing interest is better off lobbying for private rather than collective rents and when it is

likely to join a coalition rather than lobby alone. The inclusion of these three variables—institutions,

competition, and the type of rent--provides greater verisimilitude than previous formal models to the

costly and contingent nature of the political process. We test the model using interviews with 63

lobbyists for U.S. corporations. The results of the model and its tests indicate that firms allocate

resources to winning private rents over collective rents, ceteris paribus, and firms seek rents where

political competition and policymakers' costs are low."

Developing a Model of Rent Seeking

The standard rent-seeking model was developed by Tullock (1980) and was quite straightforward.1 Two

agents compete via a lottery for the same private rent (e.g., a government contract). To win the rent, the

agents may buy as many “tickets” as they wish, and an agent increases its chances of winning by

increasing its ticket purchases relative to the purchases of its rival. Specifically, the agents’ success

1
We will refer to Tullock’s model and the many formal models that build upon it as the standard rent-
seeking model. See Lockard and Tullock (2001) and Potters and Sloof (1996) for extensive reviews of
these models.

1
probabilities are

R1σ
P1 = (1)
R1σ + R2σ

R2σ
and P2 = , (2)
R1σ + R2σ
where R1 and R2 are the agents’ expenditures and σ indicates “returns to scale” in these expenditures.2

The standard model leads to a paradoxical conclusion: a firm’s best strategy is not to play the game

because the total investments by firms competing for a rent are normally greater than the value of the rent

(Tullock, 1980). In other words, rents are “over-dissipated.”3 But the standard model omits politics and

political institutions. Lobbyists’ success probabilities are determined only by their relative expenditures.

In the standard model the political process is costless; the decision process is unbiased; competition is

conceptualized in a manner more appropriate to economics than to politics; and the model contains only

private rents while many interests pursue collective as well as private rents.

Political science recognizes that a major role of institutions is to raise or lower the costs of making

policy changes (Polsby, 1968; Plott, 1991; Shepsle and Weingast, 1995; Jones, 2001; Kingdon, 2003).

This understanding of institutions allows us to add them to the standard model in a relatively simple

manner by conceptualizing them as the costs to policymakers of supplying rents. For example, the costs of

supplying a rent are lower to a policymaker when the rent seeker is her constituent, when the policymaker

chairs a critical subcommittee, or, in the case of bureaucrats, when providing the desired rent fits closely

with agency mission (Denzau and Munger, 1986). Electoral constraints, ideology, congressional

oversight, party loyalty, and public opinion all affect policymakers’ costs and, therefore, the probabilities

2
As pointed out in some previous studies, σ does not indicate returns to scale as usually defined.
Nevertheless, we maintain the terminology that has become accepted in this literature.
3
Lockard and Tullock (2001) have edited a volume that examines many of the attempts to solve this
paradox. We show in the companion paper (Godwin et al., forthcoming) that adding politics to Tullock’s
model solves the over-dissipation paradox in most circumstances.

2
that an interest will seek and obtain a rent. Our model represents institutions (N) as the monetized

disutility to the policymakers of supplying a particular rent. N is a continuous variable N ∈ (0, ∞ ), and

the effectiveness of a given lobbying expenditure decreases as N increases.

The introduction of N has an important consequence. In the standard game, one of the players must

win the rent. Introducing N creates a probability that neither player wins the rent. For example, two firms

might lobby for the same defense contract only to have the item deleted from the budget. In addition, if

policymakers’ costs of supplying a rent are sufficiently high, then a lobbyist is unlikely to pursue that rent.

It is easy to think of situations where lobbyists do not seek a rent because the costs to policymakers to

produce the rent would be too high.

Previous extensions of the standard rent-seeking game modeled competition by changing the

number of firms in the contest or by varying entry conditions. However, political competition can vary

even when the number of rent seekers and the entry conditions remain constant. For example, when two

firms compete for a single defense contract, political competition is intense. But in politics, two firms

may lobby for separate contracts. If one firm's success has little impact on the success probability of the

other, then political competition between them is low. On the other hand, if policymakers face a tight

budget constraint, then competition is higher because one firm's success significantly affects the other's

success probability. Nevertheless, the level of competition is less than when both firms are bidding for the

same contract. Firms also compete for policymakers' time and energy (Hall and Wayman, 1990); and, to

some extent, all lobbying efforts to place items on a legislature's or an agency's agenda are competing for

limited space. To introduce this conceptualization of competition (α) into the model parsimoniously, we

define α ∈ (0, 1] as a continuous variable that increases as the impact of one firm's lobbying affects the

success probability of another firm.

A third problem with most previous rent-seeking models is their failure to include private and

collective rents. Generally, a private good imparts rents to a single firm exclusive of other firms.

Alternatively, a collective good is non-excludable within the group: it imparts rents to multiple firms

3
(though not necessarily equally), and firms that did not contribute to lobbying may receive the rent. Some

scholars include only private rents; others (e.g., Grier, Munger, and Roberts, 1994) assume that all rents

are collective. But many interests pursue private and collective rents, and models should include both rent

categories and allow interests to allocate resources between them based on expected benefit.4 We turn

now to that task.

Lobbying for Private Rents: As we saw in equations 1 and 2, the standard model of rent seeking for

a private rent omits political institutions and requires that one firm wins the rent. By adding policymakers’

costs (N) and the level of competition between firms (α), we obtain equations 3 and 4 where NR denotes

the policymakers’ costs of supplying a private rent to firm i, and α indicates the degree to which Firm 2’s

success reduces the probability that Firm 1 will succeed.

R1
= probability that Firm 1 receives the good; (3)
R1 + αR2 + N R

αR2 + N R
= probability that Firm 1 fails to receive the good, (4)
R1 + αR2 + N R
Note that for any NR > 0 there is some chance that neither firm wins the rent, and when α < 1, both firms

may win their desired rent. As α approaches 1, the political competition between the firms becomes

increasingly intense. Thus, Firm l’s success probability falls with an increase in R2 , NR , or α.

The above formulation captures the contingent and biased nature of the political process.

A firm’s success depends heavily on the support of policymakers for providing the desired rents

4
Esteban and Ray (2001) model the degree of publicness as a continuous variable using a similar
distinction between private and public goods. Their private-public distinction draws solely on the
degree of rivalry in the good, whereas our distinction emphasizes exclusivity. In their conception of a
private good, the group as a whole lobbies and members share a rival prize equally [Each share =
(Value of prize)/(Number of members)]. For a public good, the group as a whole lobbies and members
share a non-rival prize equally [Each share = Value of prize]. No one outside the group enjoys the
benefits of either type of good. Hence, their public good is non-rival within group, non-excludable
within group, and excludable outside the group, while their private good is rival within group. In
contrast, our private-collective distinction depends only on the exclusivity of the good.

4
and the ease with which they can provide it. A firm desiring a rent that is consistent with an

agency’s regulatory mission and that can be supplied by a single bureaucrat is much more likely

to succeed than a firm seeking a rent that is inconsistent with the agency’s mission and requires

the approval of multiple officials. A firm desiring a rent that can be provided during committee

markup of an uncontroversial bill has a higher probability of success than a firm whose desired

rent requires a separate piece of legislation. A firm located in the district of a member who sits

on the committee that will decide the fate of the bill is more likely to be successful than will a

firm that is not a constituent of one of the committee’s members.

Lobbying for Collective Rents: Lobbying for collective rents occurs when the multiple firms lobby

for a rent that benefits all of them. Such lobbying is competitive if outside interests lobby against the

firms. For example, firms in the chemical industry might lobby to reduce regulatory restraints. As the

firms’ lobbying expenditures increase, ceteris paribus, so does their success probability. Environmental

interest groups or labor unions might oppose the firms through their own lobbying. Their expenditures

will decrease the probability that the chemical firms receive the collective rent. Denoting lobbying

expenditures by Firm 1 and Firm 2 for the collective good as U1, U2 ≥ 0 and policymaker costs in the

collective good case as NU ∈ (0, ∞), the probabilities are,

U1 + U 2
= probability that the firms receive the good; (5)
U1 + U 2 + P + NU

P + NU
= probability that the firms fail to receive the good. (6)
U1 + U 2 + P + NU

Here P > 0 is lobbying expenditures by the outside interest group(s). NU represents policymakers’ costs.

In our example, NU might arise from a policymaker having a conservationist ideology, reelection or

oversight constraints, or pressure imposed by the media. Note that the probabilities sum to one. An

increase in firms’ lobbying expenditures increases their success probability, but the firms may fail to

receive the good even if P were equal to zero because NU > 0.

5
 Collective good lobbying would be noncompetitive if outside interests do not oppose the firms.

For example, airlines might lobby to have the revenues from excise taxes on tickets spent only on

airport improvements and no outside group may oppose this. In this situation the success and failure

probabilities are equations (5) and (6), but with P = 0. The failure probability remains positive because

NU > 0. In the maximization problem, therefore, we treat the competitive and noncompetitive collective

good cases with the same probability expression, and let P > 0 vary throughout its range.

Maximizing Profits

With the above formulation, we are now in the position to address the question: How will firms allocate

their resources between private and collective rents so as to maximize the profits as policymaker costs and

competition for rents vary? We assume firms maximize their expected net benefits from lobbying,

henceforth “profits.” Let V > 0 be the value of the private good and L > 0 be the value of the collective

good. (For simplicity, we initially suppose V and L are the same for both firms.). Assuming efficient

capital markets, we impose no budget constraint on the firms. Thus, for Firm 1 the problem is to choose R1

and U1 to maximize expected profits by

⎛ R1 ⎞ ⎛ U1 + U 2 ⎞
max Π1 = ⎜ ⎟ V +⎜ ⎟ L − R1 − U1. (7)
R1 , U1
⎝ R1 + αR2 + N R ⎠ ⎝ U1 + U 2 + P + NU ⎠

Firm 2’s problem is identical after interchanging subscripts. The first order conditions are

∂Π1 ⎛ αR2 + N R ⎞
=⎜ 2 ⎟
V − 1 = 0; (8)
∂R1 ⎝ ( R1 + αR2 + N R ) ⎠

∂Π1 ⎛ P + NU ⎞
= ⎜⎜ ⎟ L − 1 = 0. (9)
∂U1 ⎝ (U1 + U 2 + P + NU ) 2 ⎠⎟

The second order conditions ensure that solutions to (8) and (9) maximize profits.5 Before solving the

problem, we note some of its important aspects.

6
 First, equation (7) reveals that if the values NR and NU are large enough relative to V and L,

neither firm will lobby. The following assumptions will be sufficient to ensure that firms have an

incentive to lobby:

Assumption 1: V > NR ;

Assumption 2: L > NU.

Second, notice that equation (7) is separable in the choice variables so we treat the firm as maximizing

the profit from private good lobbying and collective good lobbying separately. Finally, as firms can

refrain from lobbying, Ri and Ui are bounded below by 0; and, assuming rationality, Ri and Ui are

bounded above by the value of the rents. Therefore, we have Ri ∈ [0, V] and Ui ∈ [0, L] for i = 1, 2.6

The strategy space determined by these bounds is compact and convex, which helps to assure the

existence of a Nash equilibrium.

The Private Rent Game: We first consider the private good problem to determine pure strategy

Nash equilibria. Solving equation (8), we obtain the profit-maximizing level of R1 as a function of R2,

R1 = (αR2 + N R )V − αR2 − N R (10)

From (10) we obtain Firm l’s best reply function. R1 will be positive if R2 is low enough that it pays Firm

1 to engage in lobbying. R1 will be zero if R2 is just high enough so (10) equals zero—or if R2 is even

higher so (10) would become negative. We define any R1 that satisfies (10) as ρ1 ≥ 0 where

⎧ (V − N R )
⎪⎪ (αR2 + N R )V − αR2 − N R for 0 ≤ R2 ≤
α
ρ1 = ⎨ . (11)
⎪0 (V − N R )
for < R2
⎪⎩ α

In a companion paper (Godwin, Seldon, Lopez, forthcoming), we establish that expected profits are

non-negative on the portion of (11) on which 0 ≤ R2 ≤ (V – NR)/α. For negative expected profits,

5
The second order sufficient conditions are satisfied because ∂ 2 Π1 ∂R12 < 0; ∂ 2 Π1 ∂U12 < 0; and
∂ 2 Π1 ∂R1∂U1 = 0. Thus the Hessian matrix is negative definite, assuring that the objective function is
concave and the solutions to (8) and to (9) yield a global maximum.

7
spending zero strictly dominates the solution to (10). In short, (11) gives Firm l’s best reply function

for any level of spending by Firm 2. [See Attachment, Section A]. It can be shown that (11) is strictly

concave over the range 0 ≤ R2 ≤ (V – NR)/α, but that its exact shape depends on the relative magnitudes

of V and NR [See Attachment, Section B]. In addition, if V is sufficiently small relative to NR

(precisely, if V ≤ 4NR) then the best reply function is strictly concave and monotonically decreasing in

R2. The problem is symmetric, so Firm 2’s best reply function is given by (11) after interchanging

subscripts. The solid curves in Figure 1A show the reaction functions for the numeric example V = 100,

NR = 30, and α = 3/4.

[Figure 1 about here.]

Alternatively, if V is sufficiently large relative to NR (precisely, if V > 4NR) then the best reply function

has an interior maximum at R2 = (V/4 – NR)/ α. Figure lB shows the reaction functions for the numeric

example V = 100, NR = 12, and α = 2/3, and Figure 1C for V = 100, NR = 1, and α = 2/3, where the

interior maximum is more visually obvious.

The points of intersection in Figure 1 are Nash equilibria in the respective cases V ≤ 4NR and V >

4NR, and profits are positive in equilibrium [See Attachment, Section C]. Stability of the equilibrium

exists if, given that we are at any non-equilibrium point, one or both firms would make a higher profit

by being closer to the equilibrium. We illustrate stability in Figure 1 with arrows indicating the

direction of higher profits from points off equilibrium.

The uniqueness of the equilibrium is proven for the case V ≤ 4NR, but the case of V > 4NR is not

as simple. If V is not extremely greater than 4NR, then uniqueness is proven. However, if V were to

become extremely larger than 4NR there could be three equilibria—two asymmetric and one symmetric.

We illustrate this possibility in Figure 1D. We have been unable to construct a numeric example of this

possibility. (We believe that this game does not exist, but we have been unable to prove nonexistence.)

The directional arrows in Figure 1D indicate that if the game exists, the asymmetric equilibria would be

6
V and L are not the least upper bounds.

8
unstable. Therefore, the symmetrical equilibrium would seem the appropriate equilibrium to consider.

[See Attachment, Section D, for symmetrical equilibrium expenditures]

In the foregoing discussion, the payoffs are symmetric, but equilibrium does not depend on this.

If the value of the private goods differed between firms, the best reply function for the firm with the

higher-valued good would shift outward. Our results on existence and stability would still apply except

that the firm with the higher-valued good would spend more on lobbying than its rival.

What is the effect of increasing competition between the firms? To begin, note that for the ith

firm; i = 1, 2; we have

∂ρi Rj V
= − Rj (12)
∂α 2 (αR j + N R )

from equation (11). Using equation (12), we prove the following proposition to proceed with analyzing

the effect of competition.

∂ρi
Proposition 1: If V ≤ 4NR then < 0. Therefore, if V ≤ 4NR, combined equilibrium rent
∂α
seeking expenditures decrease with greater competition.

∂ρi Rj V
Proof: Note from equation (12) that < 0 if ≤ R j or, equivalently, if
∂α 2 (αR j + N R )

V
≤ 1 , which requires that V ≤ 4(αRj + NR) or V – 4NR ≤ 4αRj. Therefore, the best
2 (αR j + N R )

reply function will be non-increasing with increases in α so long as 4αRj ≥ V – 4NR. If V < 4NR,

then 4αRj > 0 > V – 4NR everywhere on ρi. Since Firm j’s response is identical, combined

lobbying expenditures will fall. Similarly, if V = 4NR, the only portion of the best reply function

that will not decrease with an increase in α is the intercept where Rj = 0. At all other points ρij

will decrease and the equilibrium investment of the firms will fall because the equilibrium is an

interior point in the first quadrant. Q.E.D.

Thus, if the value of the private good is sufficiently low relative to policymaker costs, then

9
equilibrium lobbying expenditures fall as competition increases. In Figure 1, the effect of increased

competition is illustrated with dashed lines. Figure 1A illustrates this for the case where V = 100, NR =

30, and α increases from 3/4 to 1.

If V > 4NR, then the effect of competition on expenditures depends on whether the initial

equilibrium lay in the downward or upward sloping portion of the ρi (best reply) function. To see this,

consider Figure lB versus 1C. As α increases, the downward sloping portion and a segment of the

upward sloping portion of the best reply function falls, whereas a segment of the upward sloping

portion rises. In Figure 1B, combined equilibrium expenditures decrease from 49.5 to 48 when α

increases from 2/3 to 1. In Figure 1C, however, when V is much larger than 4NR, the original

equilibrium is in the downward sloping portion of the best reply function, and higher competition

causes equilibrium expenditures to rise.

Intuitively one might expect that as competition increases, so would the combined amount that

firms spend lobbying. This view finds support in previous models that rely on the number of firms or

entry conditions to model competition (Posner 1975; Rogerson 1982; Sun and Ng 1999). Because our

model relies on a definition of competition appropriate to politics, however, the effect of competition

depends on the value of the rent relative to the political costs of supplying the rent. Greater political

competition will decrease expenditures if V ≤ 4NR and for many cases where V > 4NR. This result is in

line with empirical research that indicates that firms lobby policymakers on low-visibility issues

consistent with the officials’ ideology and/or constituency interests (small NR), and over which there is

little political competition (small α). This also reflects the empirical result that campaign contributions

are more likely to “buy votes” on narrow issues with concentrated benefits and dispersed costs than on

broader issues (Stratmann 1991, 1995; Witgo, 2004). Firms often look for issue niches where their rent-

seeking activities are unlikely to conflict with other firms, and the granting of the rent will not offend

other interests (Browne 1995).

The Collective Rent Game: In noncompetitive collective lobbying, P = 0. We first suppose that

10
L = L1 = L2; i.e., that the collective good is non-rival within the group and payoffs are symmetric.

Solving the first order condition (9) we obtain Firm l’s profit maximizing expenditures as

U1 = NU L − NU − U 2 . (13)

From equation (13), we obtain Firm l’s best reply function. By Assumption 2, NU L − NU > 0.

Therefore, U1 will be positive for levels of U2 low enough that it pays for Firm 1 to engage in lobbying.

U1 will be zero for levels of U2 high enough so that equation (13) is zero (or if U2 is even higher so

equation (13) is negative, which is not feasible). We define any U1 that satisfies (13) as ν1, where

⎧⎪ NU L − NU − U 2 for 0 ≤ U 2 ≤ NU L − NU
ν1 = ⎨ . (14)
⎪⎩0 for U 2 > NU L − NU
Equation (14) is the best reply function for the collective game. For a non-rival good with symmetric

payoffs (L = L1 = L2), Firm 2’s best reply function is also given by equation (14) after interchanging

subscripts. So for i, j = 1, 2, Firm j will spend a positive amount (ν1 > 0) if Firm i spends strictly less

than N U L − N U ; otherwise Firm j will spend zero. We illustrate Firm j’s best reply function in Figure

2A.

[Figure 2 about here]

Figure 2 shows that because the ν1 and ν2 functions have the same intercepts and slope, they lie on the

same locus. Therefore, any point on the best reply functions of the two firms, including the intercepts, is

a Nash equilibrium. The profit of Firm 1 is positive on any point of the downward-sloping segment of

equation (14). Thus, there are an infinity of equilibria if L = L1 = L2, as is obvious from Figure 2A.

Notice that equilibrium in the collective game embodies the free-rider incentive. Each firm would

increase its profits by decreasing its expenditures so long as the other firm increases its expenditures in

equal magnitude. The equilibrium features this effect. For a non-rival benefit with symmetric payoffs, it

is in neither firm’s interest for both to spend zero. To the extent that Firm i can get Firm j to assume

11
more of the cost, however, Firm i is able to increase its profits. Each has the incentive to free ride. If

one firm is a free rider, however, it is rational for the other firm to lobby.

For Li ≠ Lj there is a unique equilibrium in which the firm that receives the smaller benefit will be

the free rider. Suppose Firm i stands to gain more from the collective good so that Li > Lj. The firms still

have best reply functions given by equation (14), but the asymmetric payoffs separate the two functions,

as depicted in Figure 2B. There is now a unique equilibrium where the best reply functions intersect on

the vertical axis. As in Figure 2B, Firm i incurs the total cost of lobbying while Firm j, which receives the

smaller benefit, is able to free ride.7

The noncompetitive collective good game has important implications for understanding lobbying

behavior. In equilibrium with symmetric payoffs, the firms have an incentive to free ride. Thus, for certain

kinds of political goods, our model provides a theoretical basis for firms to pool their resources—to form

lobbying coalitions such as trade associations and informal lobbying partnerships to mitigate the free rider

problem. If payoffs are not symmetric, the firm that stands to gain less can force the other firm to lobby

for the collective good. Thus, our model confirms Olson’s (1965, p. 29) result that there is a “systematic

tendency for ‘exploitation’ of the great by the small.” Finally, because the firm that stands to gain less can

free ride, coalitions are less likely when payoffs among interests are more uneven. This is consistent with

previous empirical research (e.g., Suarez, 2000).

In competitive lobbying for collective goods, an outside interest opposes the firms by making lobby-

ing expenditures P > 0, which decreases the firms’ success probability. The substantive results from the

noncompetitive analysis carry over intact. In addition, we now show that if P is high enough, the outside

lobby will dissuade the firms from lobbying because it reduces the firms’ expected profits to zero. If

7
If a firm has high sunk costs (e.g., an established Washington lobbying office), the firm may have a
very low marginal cost of nominal coalition participation (cf. Esteban and Ray 2001). In light of this,
we emphasize that our νi = 0 prediction is suggestive and may be interpreted to mean “a very small
contribution.” Our free-rider result is consistent, for example, with a large firm contributing nominally
to maintain or build lobbying relationships (Hojnacki and Kimball 1998) or what Hula (1999) calls
“cheap riding.” Placing a phone call to the policymaker’s staff is greater effort than zero, but in our
model it would effectively constitute free riding.

12
payoffs are symmetric, Firm l’s best reply function under opposition from outside interests changes to

⎧⎪ ( P + NU ) L − P − NU − U 2 for 0 ≤ U 2 ≤ ( P + NU ) L − P − NU
ν1 = ⎨ (15)
⎪⎩0 for U 2 > ( P + NU ) L − P − NU

and the conditions under which both firms maximize profits changes to

ν1 + ν 2 = ( P + NU ) L − P − NU . (16)

For any pair {υ1, υ2} that satisfies the last equality, the profit to the ith firm is

⎛ ( P + NU ) L − P − NU ⎞
Πi = ⎜ ⎟ L − νi . (17)
⎜ ( P + NU ) L − P ⎟
⎝ ⎠

Thus, an outside lobby could discourage industry lobbying by spending an amount P such that profits are

driven to zero ( Π1 + Π 2 = 0 ) or, equivalently, that the firms’ optimal spending equals zero (υ1 + υ2 = 0).

To achieve this objective, P must satisfy ( P + NU ) L − P − NU = 0 or P = L – NU. Then, because

the intercepts of the firms’ best reply functions are ( P + N U ) L − P − N U , no positive profits are

available to the firms for any positive level of lobbying expenditures. Increasing P from zero causes the

best reply functions to shift toward the origin, as in Figure 2C. Setting P = L – NU, the reaction functions

would shift sufficiently to where they pass through the origin and the net returns to the firms are, at best,

zero. If the payoffs are not symmetric, the outside lobby must discourage lobbying by the firm that values

the good more highly.

Thus, competition from the outside lobby discourages collective lobbying and can completely

eliminate it if the outside lobby spends sufficiently. We can see that the threat of action by an opposing

group may be sufficient to discourage firms from the pursuit of a particular collective rent and encourage

them to seek rents with less potential conflict. These results are consistent with the literature concerned

with the social costs of monopoly, in which efforts by consumer groups to protect consumer surplus have

a negative impact on firms’ rent-seeking outlays (Wenders 1987; Ellingsen 1991).

13
 Private vs. Collective Lobbying: Numerical Examples

We have shown that firms’ decisions to lobby for private or collective rents (V or L) depend on

policymaker costs (NR or NU) and the competitiveness of the rent (α or P). Through numeric examples, we

now show the circumstances under which each type of lobbying is more favorable. We seek to answer the

following question: for a given-sized rent and given level of policymaker costs, how does private lobbying

profitability compare with collective lobbying profitability as the level of competition in both varies? In

other words, when is it in a firm’s interests to lobby for private vs. collective goods, ceteris paribus?

Specifically, we will show that for plausible parameters of the game, the areas in α–P space for

which private lobbying profits exceed those of collective lobbying are typically greater than the areas for

which collective lobbying profits exceed those of private lobbying. Thus, we show by construction that,

given the choice between a private rent versus a collective rent, cases where the firm will opt to lobby for

the private rent predominate cases where the firm opts to lobby for the collective rent. Part of this, of

course, is due to the firm attempting to free ride to the extent possible. Nevertheless, it is reasonable to

suppose, and the numerical examples will show, that if the firm has a number of private and collective

lobbying opportunities where the values of the parameters are close to those in the special cases, firms

will spend more on private lobbying, even if they spend some resources on collective lobbying.

Before proceeding, we detail some aspects of the analysis. First assuming symmetrical firms in

equilibrium, we examine one of them, Firm 1. Second, because the private game equilibrium depends on

whether V > 4NR or V ≤ 4NR, we consider several cases to incorporate the different possibilities. Third,

recall that in the collective good game each firm’s performance depends on whether lobbying

expenditures are shared equally or if one firm is a free rider. We account for these possibilities by

considering sub-cases with different shares of the collective lobbying costs. Finally, for each of these

various possibilities and defining ΠR and ΠU as the maximum profits associated with the profit-

maximizing values of α and P, respectively, we compare combinations of α and P to delineate areas under

which private lobbying is more profitable than collective lobbying, and vice-versa.

14
 Examples: We begin by fixing values of V, L, NR, and NU. We then let α and P increase from their

respective minima to their respective maxima. For any value of the constant variables, α ranges from 0 to

1, but P ranges from 0 to L – NU. For example, if L = 100 and NU = 30 then the maximum value for P is

70. We consider three cases. In all cases, V = L = 100, but the N variables differ: 1) V < 4NR with NU = NR

= 30; 2) V > 4NR with NU = NR = 20; and 3) V > 4NR with NU = 50 > NR = 20 (i.e., the third case has the

policymakers’ costs being higher for collective than for private lobbying). Profits depend partially on how

the firms distribute the burden of collective lobbying costs. So within each of these three cases, we

examine three sub-cases: a) Firm 1 is the free rider; b) the firms share equal cost burdens; and c) Firm 1

pays all costs. Thus, we have a total of nine sub-cases.

[Figure 3 about here.]

In Figure 3, for the nine sub-cases, we place α on the vertical axis and P on the horizontal axis.8 We

then plot a contour along which private and collective lobbying are equally profitable (i.e. on which ΠR =

ΠU) given optimal values for choice variables. In the area to the right/below the contour, ΠR > ΠU. In the

area to the left/above the contour, ΠR < ΠU. We see that the results depend heavily on the distribution of

collective lobbying costs. Collective lobbying is more profitable most of the time in sub-cases la and 2a,

in which the firm is the free rider and political costs are equal for both types of lobbying. As the firm

bears more of the collective lobbying costs, private lobbying becomes more profitable under more

conditions. This can be seen as we move to the right in any row. In addition, as political costs generally

are higher for collective lobbying (Smith, 2000; Suarez, 2000), private lobbying is increasingly more

profitable than collective lobbying, as in the sub-cases of the third row. In sub-case 3c, private lobbying is

always more profitable than collective lobbying. These examples suggest that increasing competition

encourages firms to seek issue niches and to lobby for private rather than collective goods.9

An Empirical Test of the Model

We are able to test several implications of our model utilizing interviews with 63 lobbyists who

8
Subcases 1c and 2c look similar, but note that the upper limit of P differs in the two graphs.

15
represented Fortune 1000 companies during the 108th Congress. Using the Lobbying Disclosure Reports

(LDRs), we identified those firms with representation in Washington, DC. We drew two random samples

of 50 firms. One sample consists of internal lobbyists (those who are employees of the corporation); the

other consists of external lobbyists (those who are not employees of the corporation). When contacting

internal lobbyists, we attempted to interview the firm’s chief lobbyist. When a firm listed multiple

external lobbyists, we randomly selected among those listed. We contacted potential respondents with a

short letter indicating that we wished to interview them concerning how they selected their lobbying goals

and strategies. We then telephoned their office and requested a 30 to 45 minute appointment. Once we

had 33 appointments in each category, we stopped the contacting. We made 85 calls to obtain the 66

appointments. Of the 66 appointments, we completed 63 interviews.

Measures: To obtain the lobbying opportunities for our analyses, we asked each lobbyist to name

up to five issues on which she spent substantial time during the previous year and to name up to five

issues on which she did not lobby even though the issue had an impact on her firm or client. We asked the

respondent to estimate the value of each rent to her firm where the categories were: less than $10 million;

$10-50 million; $50-100 million; and more than $100 million. We also asked whether the rent would

benefit only the respondent’s firm (a private rent), the respondent’s firm and one or two other firms (an

intermediate rent), or whether the rent would benefit a large number of firms (a collective rent)10 We

requested the respondent to rate the strength of the opposition on a six-point scale from “no opposition” to

“very strong opposition.” For each rent we asked the respondent if her firm lobbied alone or whether the

firm was part of a formal or informal coalition. If the firm was part of a coalition effort, we asked whether

the contributions were basically equal or whether the various firms had substantially different

9
Competition increases in the sub-cases of Figure 3 as we move to the northeast.
10
In the pretest we divided rents only into two categories, the rent benefited only the respondent’s
firm” or the rent benefited multiple firms. The respondents had a strong preference, however, to divide
their answers into three categories: “only their firm,” “their firm and one or two others,” and “many
firms.” We label the second category “intermediate rents.”

16
contributions, and we asked why the contributions differed. Finally, we inquired whether the issue was

being decided by Congress, the White House, or by a department or independent agency.

The major difficulties in testing our model are the absence of direct measures of policymaker costs

(N) and expenditures for specific rents. As a proxy of policymaker costs, we observe whether the issue

was decided by Congress or by a department or agency, assuming that rents decided by Congress involve

higher policymaker costs because more decision-makers must support the rent’s provision. In our pretest

of the questionnaire, we found that respondents were unwilling or unable to indicate the total resources

their firm spent to influence a particular rent. Part of this occurs because many lobbying expenditures

such as campaign contributions, monitoring of issues, and routine communications with other lobbyists

are not divisible among the issues. In addition, external lobbyists are unwilling to discuss their fee for

lobbying on a specific issue. We ultimately decided to measure lobbying expenditures as a 0,1 variable.

The firm either allocated specific lobbying resources to obtaining the rent or it did not.

Hypotheses: The hypotheses we test are:

H1: As the value of a rent to the firm increases, so will the probability of lobbying on that issue.
H2: As competition over a rent increases, firms are less likely to lobby for the rent.
H3: Firms are more likely to lobby for private rents than intermediate rents or collective rents.
H4 : Firms are more likely to lobby for intermediate than collective rents.
H5 : Firms that benefit more from a collective rent are more likely to lobby for a collective rent than
are firms that benefit less from a collective rent.

H 6 : Firms are less likely to lobby on legislative issues than on issues decided by executive
departments or independent regulatory agencies.

Results

Our 63 interviews produced 337 issues. The respondents lobbied on 240 of those issues and did not lobby

on 97 issues. Table 1 shows the bivariate results of the hypotheses. All of the hypotheses received

support at p < .05 with the exception that firms would be more likely to lobby on private rents than on

intermediate rents. That difference was significant at the p =.08 level.

17
 Table 2 shows the results of a probit analysis of the decision to allocate resources. The independent

variables include the value of the rent to the firm, binary variables for private and intermediate rents, and

the six-point strength of the opposition scale. The multicolliniarity between an issue being a private rent

and whether an issue was decided in Congress forced us to drop the latter variable from the regression. As

Table 2 indicates, all hypotheses are supported.

Table 1: Differences in the Percent of Situations that Firms Lobby

Given a Particular Characteristic of the Rent or Lobbying Effort
Percent of Cases on
Characteristic
which Firms Lobbied
All issues 71

Value of the rent to the firm < $50 million 63

Value of the rent to the firm > $50 million 77**

Rent is Collective 56
Rent is Intermediate 85**
Rent is Private 93*

Rent is under the control of Congress 64

Rent is under the Control of an Agency or Executive Department 93**

No opposition to the lobbying effort or the opposition is very weak 95

Opposition to the lobbying effort is either strong or very strong 67**

Firm would lobby as part of a formal or informal coalition 60

Firm would lobby alone 90**
**
Difference in proportion test between this item and the item immediately above it significant at p < .05
*
Difference in proportion test between this item and the item immediately above it significant at p < .10

Table 2: Probit Regression on the Decision to Lobby

Probit estimates Number of observations = 327

LR chi square = 73.0
Log likelihood = -165.76 Prob > chi square = 0.000
Pseudo R2 = .18
Variable Coefficient Std. error Z P>|Z|
Importance of rent to firm .424 .094 4.49 .000
Strength of opposition -.200 .088 -2.29 .029
Private rent 1.205 .257 4.70 .000
Intermediate rent .775 .205 3.79 .000
Constant -.519 .440 -1.18 .344

18
Notes: Dependent variable is binary with 1 indicating the firm lobbied on the issue.
Coefficients reported are in marginal effects.
Issues are clustered by firm and the standard errors reported are heteroskedasticity robust.

19
 To test accurately whether smaller beneficiaries of collective rents free ride on the efforts of the

larger beneficiaries requires knowledge for each issue of which firm expects to be the largest beneficiary

and which firms expect to be smaller beneficiaries. Unfortunately, the survey data do not contain that

information. We can test the hypothesis indirectly by examining the answers respondents gave when

asked about the most recent formal or informal cooperative lobbying effort in which they had participated.

We first asked if the expenditures of firms in the coalition were generally equal or unequal. All but two

respondents indicated that the resource expenditures were unequal. When asked why the firm that spent

the most resources was willing to do this, 84% of the lobbyists indicated that the rent involved was more

important to that firm than to the other firms in the coalition. In addition, several respondents indicated

that they chose not to lobby on a collective rent issue because another firm with a much greater stake in

the issue would be lobbying on that issue. Our interviews suggest, therefore, that when firms have a lesser

stake in an issue, they often free ride or, as Hula (1999) suggests, they engage in “cheap riding,” a

situation where they spend far less than the dominant partner in the coalition.

Discussion

There are, of course, several limitations of our model and data as our game omits certain aspects of the

political process. The most important of these is that the game includes only a single trial. Respondents

frequently indicated that lobbying is an iterative process where interests build long-term relationships that

express themselves in recurrent informal coalitions. Second, the model does not distinguish between

intermediate and collective rents, but this distinction was important to the behavior of our respondents.

Finally, by obtaining respondents from the Senate’s Lobbying Disclosure Reports, we over-sampled

respondents who lobby the legislative branch and under-sampled lobbyists who focus on the executive

branch and independent agencies. This almost certainly led to an over-sampling of collective rents. It is

important to note, therefore, that correcting this sampling problem probably would increase the strength of

the arguments for the importance of private goods.

20
 What have we learned from the model, its comparative statics, and empirical tests? Most

important, ceteris paribus, firms prefer to pursue private and intermediate rents that have low policymaker

costs and low levels of competition. But most previous political science studies of lobbying have

neglected precisely these types of rents (McFarland, 2004). We believe their omission has led to

inappropriate conclusions concerning the (lack of) influence of corporate interests. If corporate interests

are most successful when pursuing private rents, then the conclusion of pluralists (e.g., Sorauf, 1992) and

neopluralists (e.g., Lowery and Gray, 2004) concerning the lack of consistent influence by economic

interests is correct only for highly collective rents. Second, the conventional wisdom that lobbyists should

form coalitions to be successful also is overstated. Firms generally maximize profits by free riding (or

cheap riding) when a desired rent is collective. Finally, the above findings suggest that formal models can

accurately predict lobbying behavior despite the complex and contingent nature of politics. To achieve

accuracy, however, formal models must include institutions, conceptualize competition in a way

appropriate to politics, and include both private and collective rents.

21
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23
 Figure 1
The Private Good Lobbying Game: Equilibrium and Effect of Competition

Figure 1A: Case of V < 4NR Figure 1B: Case of V > 4NR
Solid lines: V = 100; NR = 30; α = 3/4 Solid lines: V = 100; NR = 12; α = 2/3
Dashed lines: V = 100; NR = 30; α = 1 Dashed lines: V = 100; NR = 12; α = 1

Figure 1C: Case of V Much Greater than 4NR Figure 1D: Case of V Very Much
Solid lines: V = 100; NR = 1; α = 1/3 Greater Than 4NR?
Dashed: V = 100; NR = 1; α = 1 Unproven Possibility of Multiple Equilibria
 Figure 2
The Collective Good Lobbying Game

Figure 2A: Firm i’s Reaction Function in the Noncompetitive Case with Symmetric Payoff
Lj = Li = 100, NU = 20, P = 0

Figure 2B: Firms’ Reaction Functions in the Noncompetitive Case with Asymmetric Payoff
Li = 100, Lj = 75, NU = 20, P = 0

Figure 2C: Effect of Increasing Competition

Lj = Li = 100, NU = 20, P = 0 then P = 5
 Figure 3: Profitability of Private vs. Collective Good Lobbying with Variable Competition
To the right of contours, ΠR > ΠU: private lobbying is more profitable than collective, ceteris paribus.

Figure 3A: Case 1: V < 4NR: V = L = 100; NR = NU = 30

Sub Case 1a: Firm 1 Pays Zero Sub Case 1b: Firm 1 Pays Half Sub Case 1c: Firm 1 Pays Entire
Collective Lobbying Costs Collective Lobbying Costs Collective Lobbying Costs 

Figure 3B: Case 2: V > 4NR: V = L = 100; NR = NU = 20

Sub Case 2a: Firm 1 Pays Zero Sub Case 2b: Firm 1 Pays Half Sub Case 2c: Firm 1 Pays Entire
Collective Lobbying Costs Collective Lobbying Costs Collective Lobbying Costs

Figure 3C: Case 3: V > 4NR and NU > NR: V = L = 100; NR = 20; NU = 50

Sub Case 3a: Firm 1 Pays Zero Sub Case 3b: Firm 1 Pays Half Sub Case 3c: Firm 1 Pays Entire
Collective Lobbying Costs Collective Lobbying Costs Collective Lobbying Costs

P ∈ [0, L-NU] is a variable that increases with greater competition in collective good lobbying.
α ∈ (0, 1] is a variable that increases with greater competition in private good lobbying.

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