Requerimientos del sistema

In the second stage, the new policy is taken as given. The interest groups pressure the government to implement the new policy at their preferred level of implementation. The implementation level describes the expenditures or the effort the government allocates to the new policy.

The second stage is a two-period game of common agency, as in Dixit, Grossman, and Helpman (1997) and Grossman and Helpman (1994, 2001): In the first period, the lobbies k ∈ {I, N} simultaneously and non-cooperatively choose a contribution scheduleCk(X) from a setC of feasible schedules. Cis as-

sumed such as to guarantee interior solutions in equilibrium. The contribution schedules are assumed to be continuous and differentiable. They constitute a binding promise of the lobby to pay a certain amount of contributions in exchange for each feasible implementation level.20

In the second period, the government chooses an implementation level X

from a set X of feasible implementation levels, taking into account its own objectives and the contributions of the two lobbies. The expenditures X for the new policy are a part of the total tax revenue T of the government. The rest of the tax revenues, T −X, is spent on other policies. In this section, we first describe the strategies of the interest groups. Then, we set up the objective function of the government and explain the government’s strategy.

The Lobbies

The lobbies influence the government by direct political contributions. These can range from explicit bribery over donations to the government party to providing lucrative positions for politicians. The contributions are of a private nature for the government. They cannot be used to finance policy implemen- tation, to lower taxes, or to be distributed to the citizens. The utility function 20_{That lobbies are able to commit to their payment schedule is a common feature of all}

models of lobbying with common agency. In a dynamic setting, this commitment could be created by reputation effects (Aidt, 1998).

4.3. THE TWO-STAGE POLITICAL PROCESS 101 of lobby k is given by:

Uk=−Ck(X) +uk(R∗I, R

∗

N)X+sk(T −X) (4.2)

The trade-off for the lobbies in the policy implementation game is the fol- lowing: Both lobbies have to incur the costs of lobbyingCk(X). The first-stage

utilityuk(R∗I, R

∗

N) from the policy compromise lets them desire government ef-

fortX for the implementation of that policy. There is also another policy that is financed out of the remaining tax revenue T −X. This can be taken to be a sort of num´eraire for all other policies that the government undertakes. The lobbies gain the utility sk(T −X) from that policy. The parameter sk > 0

captures the lobbies’ status-quo bias or their opportunity costs from the new policy. When implementing the new policy, the government diverts resources from other policies that are also beneficial for the lobbies. This reduces the value of the new policy for the lobbies.

The size of sk measures how well the status-quo policy reflects the interest

of a lobby: If sk is high, the lobby receives high gains from the status-quo

policy and suffers if resources are diverted towards the new policy. Generally, the sk do not have to be symmetric for both interest groups. For example,

a government could have been protecting the industry, so that I’s status-quo utility is very high, whereas N’s is very low.

The marginal utility of contributions for a lobby is given by:

∂Uk ∂Ck =−1 +πk ∂X(CI, CN) ∂Ck = 0 (4.3)

The marginal costs of contributing are 1. πk = uk(RI∗, R∗N)−sk denotes

the marginal lobbying interest in the implementation of the policy compromise. The second term of equation 4.3 shows the marginal utility for lobbyk of the change in X induced by a marginal increase in lobbying contributions. When

πk < 0, the lobby wants less government effort for that policy as then, its

status-quo bias sk outweighs its utility uk from the new policy. Whenπk >0,

the lobby strives to increase the policy implementation level.

The Government

In the policy implementation stage, the government chooses the expenditures

102 CHAPTER 4. GOVERNMENT INERTIA

driven by the desire to be reelected and to appropriate lobbying contributions. We do not explicitly model elections. Instead, we assume that the government maximizes its chance of winning the next elections by maximizing the utility of the representative citizen. This could also be the median voter or the aggregate of all the identical citizens.

The citizens’ utility function is given by:21

W(X) =a0γX +V(T −X) +Y −T (4.4)

with V(0) = 0, VX < 0 and VXX <0, continuous and twice differentiable.

To ensure internal and unique solutions for X, the following Inada conditions are imposed: limX→0VX = 0 and limX→TVX =−∞. The utility that citizens

get from an allocation of tax revenues to the new policy is given by a0γX

with a0 ∈ [0; 1] and γ ∈ [0; 1]. The parameter a0 describes the degree of

information on the need for the new policy, i.e., the fraction of people who are aware of the need for the new policy. For now, it is given exogenously and remains unchanged. In section 4.6,a0 is endogenized by giving the lobbies the

possibility to advertise.

The parameter γ describes the citizens’ preferences for the implementation of the new policy. It determines the amount of expenditures that the citizens want the government to allocate to the new policy.22 _{Note that this is in-}

dependent both of the utility λ that the lobbies gain from the government’s preferred policy and of the outcome of the policy compromise in stage one. Cit- izens have a fixed interest in government action. This is of course a simplifying assumption. Yet, as our focus lies on the influence of interest groups on policy implementation levels, this assumption is not overly restrictive and helps to keep the analysis tractable. As the more extreme citizens should organize into interest groups, the unorganized citizens will better like the more moderate policy of the government. Thus, γ might well be larger than λ. However, we do not impose any restrictions on that relation.

21_{The results of our model hold for a general function W(X) as long as it has a unique}

global maximum. However, for section 4.6, where we introduce lobbying by advertising, we need such a more specific function. Moreover, this more specific function helps to illustrate some of the results.

22_{In the context of foreign aid,γ can reflect the degree of altruism in a society. Citizens}

value expenditures for foreign aid less than their private consumption. Welfare in the recip- ient country is not part of this model. Typically, the altruism parameter will take a value well below 1. Surveys suggest that citizens in industrialized countries would be willing to give at most 5% of their income to foreign aid (Olsen, 2000).

4.4. LOBBYING BY CONTRIBUTIONS: EQUILIBRIUM 103