1 Lobbying: The theory of America’s (other) favorite pastime Presented by: Sharon Poczter November 26, 2007

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Lobbying: The theory of America’s (other) favorite

pastime

Presented by: Sharon Poczter

November 26, 2007

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Lobbying is economically and politically significant in the U.S.

*Data from opensecrets.org

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Top 10 U.S. Lobbying Spenders 1998-2007

Client Total

US Chamber of Commerce $338,324,680

General Electric 161,645,000

American Medical Assn 157,247,500

American Hospital Assn 138,084,144

Pharmaceutical Research & Mfrs of America 115,008,600

AARP 112,732,064

Edison Electric Institute 107,132,628

National Assn of Realtors 103,890,000

Northrop Grumman 103,151,474

Business Roundtable 101,660,000

Blue Cross/Blue Shield 90,163,317

Lockheed Martin 87,797,702

Freddie Mac 86,164,048

Boeing Co 82,038,310

Verizon Communications 81,900,912

General Motors 77,620,483

Philip Morris 75,668,000

Fannie Mae 73,857,000

Exxon Mobil 72,122,941

Ford Motor Co 71,312,808

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What is the definition of lobbying?

“Meetings between representatives of interest groups and policymakers in which the former try to persuade the latter that their preferred positions would also serve the policymaker’s interests and perhaps those of the general public.” (Grossman, Helpman 2001)

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As always, a tradeoff…

•Tradeoff in collective action:–Advantages

• Pooling resources• Increased bargaining power

•Disadvantages• Free Riders

•The logic of collective action first challenged by Olson, 1965

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What would we like to model?

• What statements by the lobby will be credible, i.e. under what conditions is it optimal for a SIG to communicate the truth about the state of the world and the policymaker to believe the SIG?

• Are there other equilibrium?

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Dimension of Variation in Lobbying Models

• Information – Two states of the world– Three states of the world– Continuous

• Number of lobbies– One, two

• Bias of lobbies– Favored direction of policy relative to

policymaker, like and opposite bias

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Equilibrium Notions in Costless Lobbying Models

• Truth-telling equilibrium (truth and trust)• Babbling equilibrium (lying and distrust)• Partial information equilibrium

– Partition equilibrium (ranges)

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Equilibrium Results for Different Environments

BiasNumber of Lobbies States of the World Truth-telling Babbling Partial Information PartitionOne Two None X XOne Three None X X X XOne Continuous None X X X

EquilibriaEnvironmental Characteristics

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Setup of the One Lobby, Two States Lobbying model

•Policy variable p •Information described by θ policy environment information•Welfare functions:

G(p,θ)=-(p-θ)²

U(p,θ)=-(p-θ-δ)²•Policymaker ideal: p=θ•SIG ideal: p=θ+δ•Policymaker behavior:

• Set p=θ when lobbying reveals true state• Set p=E(θ) when uncertain about state

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Conditions of Truth-Telling Equilibrium in Two States•Policymaker accepts any claim the lobbyist makes as the truth, lobbyist reports truth

•No incentive to lie when θ=θH

•Conditions not to lie when θ=θL

•δ≤ (θH-θL)/2

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Conditions of Another Equilibrium: Babbling

Equilibrium• Policymaker distrusts everything the

lobbyist reports• Policymaker always implements:

• p=(θH +θL) /2

• Lobbyist does not report truthfully

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Conditions for Truth-Telling in Three States of the World

•Conditions for SIG truth-telling:•δ ≤ (θM - θL )/2

•δ ≤ (θH - θM )/2

•As we can see, more states, more restrictions

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Partial Information Equilibrium: Truth-telling Violated

• SIG can report “low” versus “not low”

• Policymaker implements:

• p= θL when “low”

• p=(θH +θL) /2 when “not low”

• SIG incentive to lie

• θH: no lying

• θM,θL : policy resulting from truth report result closer to ideal than policy resulting from false report, no lying

• Conditions for SIG truth-telling:

• δ≤ (θH –θM) /4 +(θH –θM) /2 (IC for θM)

• δ≥ (θH –θM) /4 +(θM –θL) /2 (IC for θL)

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Equilibrium Analysis with Continuous Information:

Partition Equilibrium• Truth-telling harder and harder• Lobbyist can indicate ranges• “θ is in range n” means

• θn-1 ≤ θ ≤ θn

• Equilibrium conditions• θj≥ (j/n) θmax+(n-j/n)θmin- 2j(n-j)δ

• 2n(n-1) δ< θmax-θmin (Necessary and sufficient condition)

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Welfare Analysis in the Partition Equilibrium

•EGⁿ=-(1/(12(θmax- θmin))∑ (θj –θj-1)

•EUⁿ=-(1/(12(θmax- θmin))∑ (θj –θj-1)

•-∑ (θj –θj-1)3 = - (θmax- θmin)2 -4δ2(n2-1)

θmax- θmin n2

•Ex-ante welfare increasing in n more reports,

everyone better off

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Important Conclusions

• Bias important and information transmission – Equilibrium driven by δ

– As the information space becomes more “complex” (increase in number of states), full information transmission harder

– Both parties prefer outcomes with greater n

Lobbying: Part IIPresentation to 279BDec 3, 2007

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Lobbying presentation v4

Agenda

• Recap the key results from last week

• Extending the model to 2 lobbies

• Costly lobbying

• Final thoughts

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The basic setup

θL

“Low State”

θH

“High State”

• Information:- Policy maker does NOT know the true state of the world, and believes each state to be equally likely

- Interest group knows the state of the world, but can only convey this through messages

• Preferences:- Policy maker prefers the true state of the world- Interest group prefers the true state plus δ, with symmetrically falling preferences around θ + δ

δ

Policy Space: θ

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The problem is that the interest group may not have any credible message space

θL

“Low State”

θH

“High State”

δ

Policy Space: θ

δ

2-state world:

If the true state is “low” SIG reports

“high”

If the true state is “high”, SIG

reports “high”

• Two types of equilibrium emerge:- No-content equilibrium if δ too large- Fully communicative equilibrium if δ small enough

• Adding additional ‘medium’ states narrows the δ over which fully-communicative equilibria occur

- Rationale: Once the SIG has an incentive to mis-report, the policy maker will ‘shade’ their policy choice. Knowing this the SIG has incentive to over-report, etc.

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In continuous space, there are no fully-informative equilibria

θL

“Lower Support”

θH

“Upper Support”

δ

Policy Space: θ

Continuous states-of-the-world:

• If the interest group must communicate a specific θ, there are no informative equilibria

• Breakdown of fully-informative equilibrium:- Assume that the true state of the world is θ* which is reported and believed- Then the interest group has incentive to report θ**= θ*+δ- Knowing this the policy maker discounts the report by δ- Knowing the discount, the interests group reports θ*+2δ- The policy maker knows this and discounts by the bias, now 2δ- Etc.

θ* θ**

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Partial information can, however, be conveyed through communicating ranges

θL θH

δ

Policy Space: θ

• The number (and narrowness) of informative ranges depend on δ

Range 1 Range 2

1. SIG truthfully reports the range of the state-of-

the-world

p1 p2

2. Policy maker trusts the report and makes best

available prediction

3. δ must be small enough that at the highest State of the World in Range 1,

the SIG indifferent between p1 to p2


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Agenda



• Costly lobbying

• Final thoughts

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Broadening our scope to multiple SIGs, we can examine 3 types of messages

Observed Unobserved

Observed Public Messages

Unobserved Private Messages Secret Messages

Other SIG meeting with PM

Content of other SIG’s message

There are no 100% secret equilibria, since this would require belief of non-communication by the other SIG, which is incorrect.

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Private messages: A truth-telling equilibrium exists, but is fragile

• Truth-telling equilibrium:-Policy maker interprets with p* = min(m1,m2)

-Both assumed to tell the true state of the world-Unilateral deviation if unprofitable:

mi lower than θ results in p<p* yielding lower utility

mi higher than θ results in no change to p

-Therefore deviation is unprofitable

• But consider the following alternate strategy-Play mi=θ+δi (ideal state for SIG i)

- If mi>m-i=θ no impact of message

-But if m-i>θ then mi>m-i yields p>p* which is preferred

• Therefore truth-telling is a Nash equilibrium, but is not trembling-hand perfect

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Public messages:No complete truth-telling equilibrium exists

• Assume a truth-telling equilibrium exists-SIG 1: reports m1=θ

-SIG 2: confirms with m2=θ

-Policy-maker sets p=θ

• Consider a deviation by SIG 1-SIG 1: Reports m1=θ+ epsilon

-SIG 2: Confirms with m2=m1

-Policy-maker sets p=θ+ epsilon-Therefore SIG 1 will want to deviate

• Notice this works because messaging is sequential, so SIG 2’s strategy space is:

-F(m1,θ) = m2

-So only 1 is deviating, 2 is just responding

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Public messages:Partial-information equilibria exist

θL θH


m1- m1

+

m2- m2

+

m1-, m2

- m1+, m2

- m1+, m2

+

p1 p2 p3

Steps:

1. SIG 1 indicates a credible partition

2. SIG 2 sub-divides one of the SIG 1 message spaces

3. Policy maker learns about subdivided spaces

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Public messages:Notes on 2-SIG, partition equilibria

• In equilibrium, SIG 1 anticipates SIG 2’s message when deciding m1

• Equilibrium is then the solution to the corresponding linear system

• Many equilibria exist, depending on chosen SIG order and partitions

• Krishna and Morgan have shown-No more information is conveyed in 2-SIG messaging, than if just the more-moderate SIG messaged on their own

-Ex Ante welfare of all participants is higher for any n-division with just the moderate SIG messaging, than both

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2 lobbies, with opposite bias:Equilibria can be more informative, but not perfect

• Truth-telling equilibrium does not exist-Assume the policy-maker accepts the SIGs advice only if m1=m2, in which case p*=mi

- If SIGs advice is not credible, policy maker chooses p (say as the midpoint of θ)

-Then both will have incentive to report truthfully unless the true θ is not ‘too close’ to the mid-point (where one would prefer the default result)

• Krishna and Morgan have shown that:-Partial revelation can occur if both lobby groups are nonextreme (don’t prefer one support in all states of the world)

-Ex Ante welfare is higher under these than any single SIG lobbying result

This is just an example showing the difficulty, but the result holds in general

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Agenda



• Costly lobbying

• Final thoughts

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Lobbying costs

• Introduces signaling into the message space-Choosing costly signals conveys extra information-Recall that in the 2-state world, communication was impossible if δ was too large

• Solution requires:- Incentive constraint to hold-Participation constraint to hold (new)

θL

“Low State”

θH

“High State”

δ

Policy Space: θ

If falsely reporting the low-state as ‘high’ is costly, the SIG will choose

not to do it under some circumstances

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When Lobbying is Costly

3 Types of Costs:

1.Fixed

2.Varied

3.Imposed by policymaker

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Equilibrium Notions in Costly Lobbying Models

Equilibria

# Lobbies Information Type Signaling Mixed Partitioned

One Discrete X X

One Continuous X

Equilibria

# Lobbies Information Type Bias Free-Rider Symmetric Prevalence

Two Discrete Like X

Opposite X X

Unknown (known) X

Unknown (unknown) X

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Signaling Equilibrium with Costly Lobbying

•Whether or not the SIG chooses to lobby provides a signal

– Policymaker implements p=θH if lobbyist shows up, p= θH otherwise

•SIG willing to pay cost in θH iff:

•lf≤ (θH – θL)[ 2δ+ θH-θL] ≡ k1

•SIG refrain from lobbying in state θl iff:

•lf≥ (θH – θL)[ 2δ-( θH-θL)] ≡ k2

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Mixed Strategy Equilibrium with Costly Lobbying

•Strategy:

•Lobby with probability 1 when θ=θH

•Randomize when θ=θL

•Lobby with probability ς<1•Policymaker uses Bayes Rule:

•Expectation of p|SIG lobby– p=(θH+ ς θL)/(1+ ς)

•Set p= θL when no lobby

•SIG must be indifferent between lobbying and not lobbying when θ=θL

•ς = (θH- θL) ((δ ± √ δ2-lf)/lf) – 1

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Equilibrium with One Lobby, Continuous Information

• 2 partition equilibrium :• Lobbying informs the policymaker whether θ

exceeds a critical value or not• Situations where partition equilibrium does not

exist without cost • Equilibrium exists if for some value of θ

between θmin and θmax , SIG indifferent between costly lobbying and obtaining p from higher range, and obtaining p from lower range, with no cost

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Two Lobbies, Costly Lobbying• Like biases

• δ1>δ2>0

• Free-rider equilibrium where one group is the credible informant, lobbying in high state, not lobbying in low:

– SIG j≠i does not lobby, gets benefit– SIG i lobbies iff: (from earlier)

– lf≤ (θH – θL)[ 2δi+ θH-θL]

and

– lf≤ (θH – θL)[ 2δi+ θH-θL]

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Two Lobbies, Costly Lobbying

• Opposite Biases• δ1>0>δ2

• Free-rider equilibrium– Policymaker relies on SIG 1 for information

– SIG 1 lobbies if θ=θH, refrains otherwise

– SIG 2 free rides

» If θ=θH no incentive to lobby (policymaker won’t believe)

» If θ=θL prefers to under-report anyway

• Each group lobbies in one state

» If θ=θH policymaker only expects SIG 1 to lobby

» If θ=θL policymaker only expects SIG 2 to lobby

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Two Lobbies, Costly Lobbying

• Unknown Biases– Interest groups know the state of the world

• Prevalence of political activity serves as a signal of most likely state

• p increasing in number of groups lobbying– Interest groups do not know the state of the world

• More extreme group is pure advocate (conditions under which preferable to lobby even if indication is of low state)

• Less extreme group provides information• Equilibrium where policymaker chooses relatively high level of

policy if both show up, low level if only one shows up

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Two Lobbies, Costly Lobbying Bias Unknown

• Moderate willingness to lobby implies σH

• p(2) = ζθH+(1-ζ)θL

• p(1)=(1-ζ)θH+ζθL

• p(0)=(1-ζ)θH+ζθL

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Two Lobbies, Costly Lobbying Bias Unknown

• Moderate Lobbies iff:– lf≤(θH+θL)(2ζ-1)[2δ1+(θH-θL)(2ζ-1)]

• Moderate refrains iff:– lf≥(θH+θL)(2ζ-1)[2δ1-(θH-θL)(2ζ-1)]

• Extreme Always Lobbies iff:– lf≤4δ2(θH-θL) ζ(1-ζ)(2ζ-1)

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Important Conclusions

• Costly lobbying can serve as a signal• Extremism may lead to pure advocacy,

regardless of the state of the world• Free riders may exist (whether biases are

in the same direction or not)• Other things to consider?

– Selling favors

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All things considered…

• Lobbying is noisy, but full revelation may exist under certain conditions

• Theoretically, a purpose to cost of lobbying

• Also theoretically, show why pure advocacy exists (guns are good, no matter what the truth is)

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Access costs

• The policy-maker can charge for access to their time

• If SIGs make this choice after finding out the state of the world, we this is just the costly lobbying described earlier

• If SIGs make this choice before finding out the state of the world (e.g. election campaign donations), then:

-Modestly-biased groups pay more for access because more informative partition equilibria exist (more divisions, better splits)

-Cost of access can vary, involving a bargaining split of the residual between the policy-maker’s benefit of hearing the signal and the SIGs benefit from the policy

Implies varying access costs can exist for issues of different value to the policy-maker

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Agenda



• Costly lobbying

• Final thoughts

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Critique

• Very dependent on the linear modeling of the policy space- Parallel between the Hotelling’s linear beach vs. circular beach

• Strongly dependent on the weak order assumption of preferences (ie. θ+δ > θ+δ+1 > θ+δ+2, etc.)

- But SIG’s preferences may not be continuous

• Real lobbying is characterized by:- Strong reputational effects- Repeated interactions

Documents

1 Lobbying: The theory of America’s (other) favorite pastime Presented by: Sharon Poczter November 26, 2007