Constitutional Institutions, Lobbying Contributions and Policy Outcome

1
Constitutional Institutions, Lobbying
Contributions and Policy Outcome

• Alon Cohen
• The School of Economics
• Tel-Aviv University
• Advisor Assaf Razin

March, 2005
2
Motivation

• What is lobbying?
• Lobbying equilibrium deficiencies
• Policy and institutions are biased towards strong
  interests groups (Glaeser, Scheinkman and
  Shleifer 2002).
• Resources dissipation estimated by 10 Billions
  annually in the U.S. (Mueller 2003).
• Institutions and tools like procedural
  constitutional provisions, CBI, balanced budget
  rule, political competition and others, mitigate
  these outcomes.

3
Main Argument (1)

• How does (substantial) constitutional institution
  influence the lobbying equilibrium?
• General-interests-regarding constitutional
  standard (Cooter 2001), which is credibly
  enforced by an independent judiciary (Sutter
  2002), can alleviate both problems.
• Special-interests-regarding constitutional
  standard, which is credibly enforced by an
  independent judiciary, can escalate both problems.

4
Main Argument (2)

• Which constitutional institution is generated in
  an endogenous system (Macey 1986)?
• Constitutions that cannot be lobbied induce the
  politician to adopt a general-interests standard
  Constitutions that can be lobbied induce the
  politician to adopt a special-interests standard.
• Economic uncertainty induces the politician to
  forfeit policymaking power to the judiciary. This
  enables the courts to credibly enforce the
  constitution (corrective device).

5
Literature Review Lobbying

• Olson 1965, Stigler 1971, Peltzman 1976
  Regulation for sale. Transfers benefit
  small-concentrated groups and encumbered by
  large-diffused groups.
• Becker 1983Pressure model. Lobbying
  competition increase efficacy, due to taxations
  deadweight costs.
• Grossman and Helpman 1994, 1998 Campaign
  contributions. Encompassing the actions of both
  the politician and the lobbies.

6
Literature Review Constitutionalism

• Principalagent Anderson and Hill 1986,
  Persson, Roland and Tabellini 1997
• McCubbin and Schwartz 1984.
• Uncertainty Buchanan and Tullock 1962
• Ramzier 1994, Hanssen 2002.
• Commitment North and Weingast 1989
• Landes and Posner 1975.

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The Model

• Framework 2OLG model, one working period,
  endogenous labor with two distinct exogenous
  efficiency levels, ?i, constant population
  growth rate, n.
• Individuals
• Lobbies choose contribution schedules,
  , non cooperatively and simultaneously, to
  maximize their net (indirect) utility. They
  retain full bargaining power.

8

• Firms
• Constitution/Courts
• where ? c is the constitutional standard and P
  (.) is the judicial enforcement technology,
  indicating the relative judicial power. Initially
  C is exogenous.
• Government/Politician
• The government collects taxes and redistributes
  it via public good (Drazen 2000)

9

• where a is the benevolence measure, W(.) is
  concave and bounded and ? i,j is the lobbies
  organization level (Facchini, Razin and Willmann
  2004).

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Order of Events

• The lobbying game.
• Policy choice.
• The economy is operated Contributions are
  effected.
• Constitutional judicial review.

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Constitutional-Lobbying Equilibrium

• Equilibrium is a policy choice, contribution
  schedules and private choices, such that for
  either group (i,j) (following Grossman and
  Helpman 1994)
• Conditions (I) and (II) refer to the policy
  choice. Not only is the policy choice politically
  optimal, but it must be Pareto efficient.
  Otherwise, the lobby would have reconstructed its
  contribution schedule accordingly.

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• Conditions (III), (IV) and (V) refer to the
  contribution schedules. The contribution level
  must also be Pareto efficient, for the same
  reason. Additionally, it must meet the
  feasibility constraint. Finally, the politician
  is indifferent either to accept or reject a
  contribution, due to the full bargaining power of
  the lobby.

13

• Condition (VI) refers to the individual choices.
  Labor supply and consumption stream are optimal
  given the fiscal stance.
• Note that the optimal choices are not subject to
  the constitution. This reflects an assumption of
  immediate adjustment of the economy to the fiscal
  stance.

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Policy Choice in Equilibrium

• Since the policy is Pareto efficient, then the
  following locally truthful property holds
• That is, in equilibrium, the lobby equalizes
  marginal benefits and costs from policy shift.
• Given (7), the policy choice is embodied within
• As all sectors are organized to some degree, the
  locally truthfulness nullifies general
  interests considerations.

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• Without constitution, P 0, equation (8) is
  reduced to
• Clearly, as a lobby is better organized (higher ?
  i,j ), the policy is tilted to its benefit.

g(b(?))
16

• In order to characterize ?, we assume
• where P (.) is convex and weakly increases as
  the enacted policy deviates from the
  constitutional standard, ? c.
• One can easily note that ? is closer to ? c,
  than ?l is

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Lobbying Contributions in Equilibrium

• Possible Lobbying schedules are infinite.
  Globally truthful schedules (Grossman and
  Helpman 1994)
• A possible solution to the constitutional-lobbying
  game
• Namely, the lobbies (weakly) reduce their level
  of contributions, proportionally to the judicial
  power. The judiciary serves as a non-lobbied
  second policymaker.

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Endogenous Constitution

• A random variable , which captures
  the state of the economy, is introduced. We
  assume that labor productivity, ?i(? ), is
  positively correlated with ?.
• The reason is that the politician delegates part
  of her policymaking power, namely, set P to be
  positive, if and only if her policy choice could
  be sub optimal.
• We divide the discussion into two possible
  situations
• The constitution can be lobbied.
• The constitution cannot be lobbied.

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The Constitution Can be Lobbied

• The Contribution schedule is now L(?, ? c,P ).
• Each (lobbied) policy component choice, (?, ? c,P
  ), must be Pareto efficient.
• Therefore, the politician adheres only to the
  contributions consideration. Hence ? c is
  special interests regarding.
• Since the contribution schedules are optimally
  designed, then L(?, ? c,0 )L(? ).
• Naturally, then, P gt0 ? L(?, ? c,P )gt L(?, ? c,0
  ).

20
The Constitution Cannot be Lobbied

• The contribution schedules are L(c)(? ?C), where
  C captures the anticipated constitution.
• In equilibrium we must have CC.
• Since the constitution cannot be lobbied
• The lobbies are indifferent as to the nature of ?
  c. Thus ? c is general interests regarding.
• The contribution is proportionally reduced for
  any level of P. Thus P trades off between
  special and general interest considerations.
  Comparative static indicates that P is indeed
  U-shaped over ? .

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• Recap
• No-constitution lobbying equilibrium benefits
  highly organized groups and exhibits resources
  waste.
• Constitutions can either improve or worsen these
  problems.
• The constitutional impact over lobbying
  contribution depends upon whether the
  constitution is rigid enough, such that it cannot
  be lobbied, or not.