Pluralism

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Pluralism

• Society composed of various groups
• Different segments organize successfully to
  bargain with each other and influence politics
• Presupposes that each group elects
  representatives
• Ideally, representatives have influence
  proportional to number of citizens they represent

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Testing the Pluralist Hypothesis
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Olsons Logic of Collective Action

• Took on political science establishment and the
  pluralist hypothesis.
• Individuals are tempted to free ride, have
  difficulty coordinating on multiple objectives,
  and have conflict of interests.
• Group formation and maintenance are the central
  problems of public life.

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• Olson claims large groups have the most
  difficulty
• Large groups tend to be anonymous.
• Unlikely that any individual is pivotal.
• Enforcement is problematic.
• As a result, many large groups remain latent and
  are not represented.

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• Olson calls small groups privileged because
  they have advantage in overcoming problems of
  cooperation.
• Members of small groups are more vulnerable to
  persuasion.
• Higher chance an individual is pivotal.
• Often engage in repeat play.

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• Inequality within groups may help to achieve
  goals.
• Powerful members exploited by weak.
• NATO allies free ride on U.S.
• U.S. cant free ride.
• By rejecting pluralist hypothesis, Olson explains
  the power of small numbers.

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• By-Product Theory Large groups elicit
  contributions by providing goods not central to
  group mission.

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• Political Entrepreneurs
• Groups can come into being through work of
  political entrepreneurs.
• Certain benefits accrue to those who organize
  groups.
• Political entrepreneur sees cooperative surplus
  that is not being achieved. For a share of
  surplus, entrepreneur will organize group.
• Complementary to Olsons analysis of by-products.

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• Interest Group Activities
• Interest groups attempt to influence government
  decision-making.
• There is competition among consumer, owner,
  labor, environmental and other groups.

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Tools

• Outright bribes are illegal, but do occur.
• Revolving door.
• Ongoing personal relationships.
• Industry may refrain from criticism of
  government.
• Industry may provide information to decision
  makers.
• Indirect transfers to legislators.
• Campaign contributions.

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• Rent-Seeking Activities
• Case of a tax on sales.
• Producers and consumers bear burden of tax.
• Revenues go to third party.

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S
P0 t
A
B
F
PC
G
C
P0
D
H
E
D
X0
XC
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• Restaurant Profits
• Before tax C D G.
• After tax D.
• Loss C D G D C G.

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• Restaurant Patron Utility
• Before tax A B F.
• After tax A.
• Loss A B F A B F.

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• Gain to Tax Recipients B C.
• Net Loss to Society B C (CGBF) G
  F excess burden.

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• If all groups have equal ability to organize, tax
  will not pass.
• Gain to tax recipients is below loss to consumers
  and restaurant owners.

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• But society can still lose because groups spend
  money on lobbying.
• Recipients would spend up to B C.
• Restaurants up to C G.
• Patrons up to B F.
• Maximum total lobbying of 2B 2C G F.
• Dissipated resources.

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• One Further Point
• Suppose small number of tax recipients, but large
  number of patrons and small number of
  restaurants.
• Will tax pass now?

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Limitations of Free-Rider Principle in
Representation

• Politicians ultimately concerned with number of
  votes delivered by lobbyists
• Concentrated industry may spend a lot of money
  per vote delivered
• Popular organizations may be more efficient in
  this sense

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• Examples
• Banking and insurance industries
• Sierra Club
• AARP
• NRA has both advantages
• Concentrated producers
• Large, motivated membership

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Interest Groups and Regulation

• Basic observation regulation is not strongly
  associated with market failure
• Also not exclusively pro-producer
• Welfare of different groups can be improved by
  regulation

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Stiglerian Approach

• Major breakthrough in 1971 with The Economic
  Theory of Regulation
• Major value not so much in its predictions but in
  the way it approached the question of why there
  is regulation
• Premise is that the basic resource of the state
  is the power to coerce
• Interest groups compete to influence the state to
  use its power to their benefit
• Regulation supplied by legislators and agencies
  in response to the demands of interest groups

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• Regulation is a tool by which an interest group
  can improve its well-being through redistribution
  of resources
• Stigler We assume that political systems are
  rationally devised and rationally employed, which
  is to say that they are appropriate instruments
  for the fulfillment of desires of members of that
  society.

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Peltzman Model of Regulation

• Peltzman formalized Stiglers approach
• Three basic elements
• Regulation redistributes wealth
• Behavior of regulators driven by their desire to
  remain in office
• Interest groups compete for favorable regulation
  by offering political support

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• General result regulation will be biased toward
  benefiting interest groups that are better
  organized and gain more from favorable regulation
• Earlier analysis suggests that this will be
  primarily small interest groups with strong
  preferences

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Example Price-Entry Regulation

• Groups consumers and producers
• Consumers care about price and producers care
  about profit
• Let net political support be M(P,R)
• M is decreasing in P
• M is increasing in R
• Profit depends on price, and is R(P)

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Predictions of Peltzman Model

• Equilibrium is for regulated price to be between
  competitive and monopoly price
• Regulation is unlikely if pre-regulation
  equilibrium is close to regulated outcome
• Thus, industries most likely to be regulated are
  very monopolistic (agriculture) or very
  monopolistic (telecom, electricity, railroads)
• In either case, some group can gain a lot from
  regulation