Strategic Government Behavior and Lobbying Under Asymmetric Information∗

This paper models influence activity as a dynamic game between special interest groups and a policymaker whose preferences are not known with certainty. In case of a single lobby, in a two—period model I show that the policymaker overstates her benevolence in the first period to build a reputation for being “honest” in order to withhold more rents in the second period. The lobby, recognizing this incentive, tries to filter out the bias. Nonetheless, the policymaker, taking advantage of the inherent ambiguity in the information structure, is able to manipulate policy in the first period. I also present results when there is competition between lobbies and show that the implemented policy depends crucially on their preferences. Specifically, the policymaker tries to reveal as much information as it can when both lobbies have similar preferences. The model can be applied to study trade policy, environmental regulations and rent extortion by government officials. ∗I would like to thank Michelle Garfinkel, Stergios Skaperdas and Priya Ranjan for their constant encouragement and advice. I would also like to thank all participants of the “Informal Development Workshop” at UCI, Amihai Glazer and Garance Genicot for detailed comments on earlier drafts of this paper. All remaining errors are mine. †3151 Social Science Plaza A, University of California, Irvine, CA 92697-5100 Email: [email protected].