Economic Environment of Business

Session 8 & Session 9

Government & Markets
Distributive Politics Worksheet

Veena Keshav Pailwar

Professor
IMT Nagpur

Veena Keshav Pailwar 1

 The Amount of Non-market Action

• The amount of non-market action = f(Demand and

Supply)

• Demand for actions = f(Benefits (aggregate, per capita);

substitutes)

• Supply of actions = f(Effectiveness, costs)

 Demand for Non-market Action
• Important determinant of
demand for non-market
Aggregate actions
benefits to the • Positive relationship
interests on a between aggregate
benefits and demand for
side of an issue Non-market Actions

• If the aggregate benefits

Per capita are substantial and
Demand for benefits for an concentrated, the per
capita benefits will be
Non-market individual high
Actions interest • If the aggregate benefits
are widely distributed, the
Availability of per capita benefits can be
Substitutes small
available for a • Greater the availability of
non-market action substitutes for generating
for achieving the benefits, lower the
demand for non-market
benefits action.
 Supply of Non-market Action
• If the number of members in the group is higher
Effectiveness of a effectiveness will be higher
• If the member are wide spread (higher geographical
Non-market reach) the effectiveness is higher
action • If the resources available with the group are higher,
effectiveness is higher
Supply of • If the number of affected individuals or groups is
Non-market small, the costs can be high.
• The costs of organization can be reduced by
Actions
associations and standing organization
(costs) • Free rider problem increases the cost of organizing.
• When groups are small, punishment and exclusion
Cost of identifying, are easier to apply to those who free ride.
• Bundling of non-market actions and services, can
motivating, reduce the free-rider problem.: e.g. sharing the
organizing and market data only to their members
mobilizing interest • Members may be mobilized on an ad-hoc basis to
group members address a particular issue
• Formal organization can raise and monitor the
progress of issues on continuous basis
Factors affecting Effectiveness of Non- Numbers: Greater the number of members of an interest
market Action group, greater the potential effectiveness .

Coverage: Greater is the number of political jurisdictions

covered by the group, greater the potential of effectiveness
of non-market strategies
Resources: The greater are the resources available to an
interest group, the greater is the set of activities that can be
funded
Greater is a group’s stake in an issue, the greater are the
resources that potentially can be used to fund a non-market
strategy
 The Distributive Politics Spreadsheet
• The spreadsheet pertains to a specific non-market alternative.
• It is organized in terms of interest that are likely to support it and the interest that are likely to
oppose it.
• The top panel of the spreadsheet represents the supporting interests
• The bottom panel of the spreadsheet represents the opposing interests.
• The spreadsheet summarizes the analysis of the benefits and costs of non-market actions.
• The demand side information in the spreadsheet for each interest includes the available
substitutes, the aggregate benefits, per capita benefits for individual members of the interest
group.
• The supply side information includes the number of members, their coverage of political
jurisdiction, their resources and the cost of organizing non-market action
• The information in the spreadsheet provides the basis for a prediction of the non-market
action likely to be generated by the interests.
• This prediction is used for assessing the likely outcome of the issue and in formulating the
strategies to affect the outcome.
• Institutions and institutional officeholders are not included in the spreadsheet because they
decide the fate of the non-market alternatives.
 Wilson-Lowi Matrix
Nature of Political Competition

• Non-market actions of opposing interests lead to competition in an

institutional arena.
• The actions of the opposing interests and the characteristics of the
institutions and their officeholders determine the outcome of competition.
• The nature of political competition on an issue = f (concentration or
dispersion of the benefits and costs from an alternative).
• The columns of the matrix are associated with those interests that would
benefit from the alternative relative to status quo.
• The rows of the matrix are associated with interests that would be harmed
by the alternative relative to the status quo.
• Concentrated benefits or harms: If the per capita effects are high.
• Widely distributed benefits or harms: If the per capita effects are low.
 Wilson –Lowi Matrix: Nature of Political Competition
Benefits from Enacting the Non-market Alternative
Concentrated Widely
Distributed
Concentrated Interest Group Entrepreneurial
m the Non-market Alternatives

Politics Politics
(Converse of
Client Politics)
Widely Client Politics Majoritarian
Distributed (Converse of Politics
Entrepreneurial
Politics)
 The Nature of Political Competition
Interest Group Politics Entrepreneurial Politics Client Politics Majoritarian Politics
• Both benefits and • Benefits are widely • The benefits are • Both benefits and
harms are concentrated distributed and harms concentrated but harm harms are widely
• Both supporters and are concentrated. are widely distributed. distributed
opponents have • Those bearing harms • The interest that • The incentives to take
incentives to take non- have a stronger benefit have stronger non-market actions are
market action incentive to take non- incentives to take non- likely to be weak
• If the costs of non- market action than do market action than do • Outcome is determined
market actions are low, the beneficiaries. those who incur the by the preferences of a
then interest groups • An entrepreneur is harm. majority
will be active on both needed to mobilize • Beneficiaries work to • e.g. politics of social
sides of the issue. those with dispersed become the clients of security: each
• The outcome is benefits the institutional individual benefits from
determined by the • Opposite of client officeholders – to get social security but is
amounts and politics the benefits also taxed to support it.
effectiveness of the • Officeholders can serve
non-market action the clients with little
generated by the risk of opposition from
interests on each side the other side.
of the issue. • Opposite of
entrepreneurial politics
Impact of Institutions and Institutional Officeholders on the Policy Making

• The characteristics of legislative institutions: committee structure,

location of supporters, opponents on the relevant committees can
affect the decision on the policy.
• The position taken by a cabinet agency or the president can also be
important.
• The preferences of those who hold offices in the institution can affect
the outcome. They may attempt to influence other officeholders or
trade their vote on an issue of lesser importance for the vote of
another officeholder on a more important issue.
• Legislators may be constrained by their duties or/ and the interest of
their constituencies from where they are re-elected
 Moral Determinant of Collective Action
• Moral concerns differ among individuals. E.g. some may support use
of child labour in factories as they support family income- otherwise
they may live in extreme poverty. But, some may be absolutely
against it- as working child may loose an opportunity for proper
education
• These concerns may be in conflict with each other and therefore may
compete with each other in a non-market environment.
• It is difficult to predict non-market action based on moral concerns:
depends not only on the differences among individuals but also on
the intensity of conviction with which those conflicting concerns are
held.