VICTORIAS EFIMERAS

invisible hand institutions, arrangements that achieve benign results without undue reliance on

benevolent motivations. To test out whether such institutions are present or not, one must assume non- benevolent motivations: one does not test whether a plate is oven-proof by placing it in the cupboard.”

course, either individually support or oppose the change, but there are information costs in being well informed.

We further assume that ownership of the specific factors is concentrated among a few and their gains or losses are relatively large compared with the information cost. Therefore they are fully aware of the likely consequences to them of the tariff changes. The owners o f the mobile factor, workers in particular, are numerous. For anyone in this group the cost of information exceeds the benefit. Therefore, they remain rationally ignorant (Downs, 1957; Magee, Brock and Young, 1989). However, they make use of the ‘free’ information - voters' education - provided by the two ‘interest groups’ or the players. Each player can obtain more workers' support for the government by spending more resources on ‘voters' education’. Hence the two interests will be contending in the political market in mobilizing workers' support to the government that will implement policies beneficial to them.

As Peltzman (1976: 213) has aptly summarized -

It is not enough for the successful group to recognize its interests; it must organize to translate this interest into support for the politician who will implement it. This means not only mobilizing its own vote, but contributing resources to the support of the appropriate political party or policy: to finance campaigns, to persuade the voters to support or at least not oppose the policy or candidate, perhaps occasionally to bribe those in office.

With this stylization of the political process, the problem of the two players and the government being resolved in the political market can be described as follows.

Given the responsiveness o f the government's pricing policy to increased mobilization o f political support, each player / chooses its lobbying expenditure, 7]-, to maximize

(5A.1) n t = /?t(/>(7j))-7fc; 1 = 1,2

where, the variables Ü; and /?, , as defined in the text, are the payoff and real rental income o f player i respectively, measured in units of own output, and Pi is the

normalized price of good i. Note that once Px is determined, P2 will be determined since it is the inverse of Px. Therefore, we will focus on the government's choice of Px only and express the functions accordingly.

The government, on the other hand, is fully aware of the self-interested behaviour o f the players. It understands that each player will spend resources in mobilizing political support for it only if the price policy it supplies is going to yield them a higher payoff than otherwise. The government also understands that if a policy change hurts a player, then the player will divert his or her lobbying effort to oppose the

policy changes and possibly finance the political campaign of the opposition. Therefore, the government, taking into account the reactions of the players, chooses Px to

maximize the Peltzman-type political support function (5A.2) S = S(n i(i’ (ti)),n2(/JI(rj)))

where, the support function S is strictly increasing and concave in its arguments.15 The act of maximizing support by the government and the act of maximizing payoffs by the private players interlock the three in a political process in which each of the private players holds an opportunity to trade fruitfully with the government by mobilizing political support for a favourable price (or trade) policy and vice versa. For example, player 1 can mobilize increased support for the government by spending more on ‘voters' education’, if the government is prepared to provide enough protection to it by raising the tariff rate (or lowering the export subsidy). Similarly, player 2 can also mobilize additional political support for the government if it returns with lower protection to the import competing sector or with increased export subsidy. The

government can provide favourable tariff protection to any of the players if he or she is prepared to spend resources sufficient to mobilize more political support than it would lose by implementing the policy.

The problems of the government and of the two players can be viewed as a Stackelberg game in which the government is the leader, and the two private players are Nash followers. The government, assumed to conjecture the reactions of the Nash players correctly, and takes into account all the reactions of the private players (subject to the general equilibrium of the economy) while maximizing its support function. It then obtains a solution function Pl(Tfx,ri2) to offer to the private players. This function will extract maximum support for it from the society whenever the players are in a Nash equilibrium. Our purpose in this Appendix is to uncover the properties of this pricing function.

Before we go onto analyse the nature of the pricing function in detail, let us clarify the scope of the appendix first. As a Stackelberg leader it may be possible for the government to choose a pricing function maximizing (5A.2) such that, given this

pricing function, each player finds no-lobbying as his best strategy, then the price that maximizes (5A.2) with r\x = r\2 - 0 also solves (5A.1) and (5A.2) simultaneously.

15 This is an indirect political support function that is based on the assumption that, besides