Interest Groups and Government Policy. A Political Economy Analysis

Abstract: Politics induce economic agents to organise into special interest groups (SIGs) and act strategically to adjust their economic decisions and to conduct rent-seeking activities in order do improve the situation inflicted on them by policy. This thesis examines, in four essays, different forms of SIG influence on public policy in different institutional contexts. The two first essays examine two related models with institutionalised political participation in the form of corporatism, where SIGs have the possibility of affect public policy from the inside. Essays three and four, on the other hand, examine the contrast, where SIGs on their own initiative, try to affect public policy from the outside. There are several possibilities to affect public policy from the outside. The three major activities undertaken by SIGs are those intended to educate and convince policymakers of the own group’s position; to educate and inform the general public; and contributing financially to political candidates. Campaign contributions have been regulated for long in western democracies. A number of European states have limited the spending while the United States have limited the donations. Despite the regulations, money and politics are closely related, particularly in the United States, though it is also a well-known phenomenon in e.g. Italy, United Kingdom, Japan, India and Brazil. The two last essays in this thesis examine effects of the provision of selective information to voters, in combination with financial contributions to politicians. The first essay, Corporatism and Economic Performance, analyses the effects on economic performance of a corporatist social organisation in a union government game. The analysis shows that a corporatist economy is more efficient in a stable environment, but in a volatile environment the results from corporatism are ambiguous. This indicates that international conditions might be important for the effects of corporatism. The second essay, Corporatism, Preferences and Economic Performance, examines the effect of a restriction that the unemployment benefit level cannot exceed the net wage rate, in a union government game. Given this restriction a corporatist social organisation induces lower net wages. The results of the game in terms of benefits and employment are however, ambiguous and depend critically on the preferences of the union and not on the preferences of the government. The third essay, Lobbying for Growth in an Economy with Inequality, analyses the relation between inequality and growth. A situation where SIGs can affect voters by providing selective information is compared with a situation where SIGs are also allowed to contribute financially to politicians. Depending on how responsive voters are to the use of campaign funds in the election process, information and financial contributions may serve as complements. If so, rent-seeking is less probable to be a hindrance to growth when campaign contributions are allowed. The fourth essay, Information and Contributions in Elections with Multiple Lobbies, examines a probabilistic voting model with two competing candidates and multiple SIGs. It is shown that opportunistic politicians maximise the utility of strategic voters, the impressionable voters’ expected utility and campaign contributions. Moreover, competition among SIGs reduce both the amount spent on information and the financial contributions. This indicates that competition from a SIG with limited financial resources can have a substantial effect on the possibilities for financially strong SIGs to affect policy.