Inefficient lobbying, populism and oligarchy

This paper analyses the efficiency consequences of lobbying in a production economy with imperfect commitment. We first show that the Pareto efficiency result found for truthful equilibria of common agency games in static exchange economies no longer holds under these more general conditions. We construct a model of pressure groups where the set of efficient truthful common-agency equilibria has measure zero. Second, we show that under fairly general assumptions, the equilibrium will be biased against the group with the highest productivity of private capital, reflecting the fact that, on the margin, less productive groups find lobbying relatively more rewarding. Finally, as an application, if lobbies representing “the poor” and “the rich” have identical organizational capacities, we show that the equilibrium is biased towards the poor, who have a comparative advantage in politics, rather than in production. If the pressure groups differ in their organizational capacity, both pro-rich (oligarchic) and pro-poor (populist) equilibria may arise, all of which are inefficient with respect to the constrained optimum. ∗We are grateful to Alberto Alesina, Abhijit Banerjee, Francesco Caselli, Quoc-Anh Do, Jan Eeckhout, Elhanan Helpman, Richard Holden, Humberto Moreira, and Andre Sant’Anna for their helpful comments. Many suggestions by the editor, Emmanuel Saez, and two anonymous referees are also gratefully acknowledged. Finally, we thank seminar participants at Harvard University, the University of Pennsylvania, the World Bank, PUC-Rio, the NBER Summer Institute, the V Meeting of the Political Economy Group of LACEA (Cartagena, Colombia), NEUDC 2004 (Montreal), and the ASSA Meetings 2005 (Philadelphia). The usual disclaimer on remaining errors applies. Financial support for the early stages of this research was provided by Faperj. †Department of Economics, Harvard University. Contact: [email protected] ‡The World Bank Research Department. Contact: [email protected]