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Matteo Marcantognini Prsntcn Rent Seeking

Matteo Marcantognini Prsntcn Rent Seeking



Economic approach to Interest Groups by MItchell and Munger

Economic approach to Interest Groups by MItchell and Munger



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    Matteo Marcantognini Prsntcn Rent Seeking Matteo Marcantognini Prsntcn Rent Seeking Presentation Transcript

    • “ ” Matteo Marcantognini Palacios MFIESA2009
    • “Olson’s Collective Action Problem” 1965-1982Propositions: „Profitable rent seeking is most likely in industries with a high degree of concentration and almost impossible among consumer groups‟ „The typical constrained maximization approach requires both an objective (in this case, social welfare) and a constraint (here, the capacity of society to produce goods and services from which its citizens derive benefits)‟ „Interest Groups in individual rational pursuit of their own interest can in effect throttle the system, reducing its vitality and restricting the menu of social choice of everyone else‟ „The universal pursuit of political advantage leads to such perverse results as import quotas, fuel allocations, legalized monopolies, licenses, and fixed prices, all of which are designed to redistribute rents from unorganized groups (consumer and taxpayers) to organized groups‟Predictions and Prescriptions: „Not only powerful interest groups organize but such organization retards economic growth‟ and „their self interests are inimical to the public and general good‟ „The better a polity performs its task of representing the economic interests of organized groups, the worse it may be at managing its economy‟ Make the public aware of ill effects from interests and rent seeking and restore free marketsCritiques: „A difficulty of the whole approach is Olson‟s treatment of rent seeking as a pure demand phenomenon, leaving out the powerful role of the government‟ „North issues a challenge to develop a theory of the state in which the state is accorded a preeminent role‟ Matteo Marcantognini Palacios MFIESA2009
    • Olson’s Model of Welfare Losses Intuitive Analysis  The two axes represent the utility of two groups A and B  PP represents the production possibilities curve  II represents the social indifference curve  The initial optimal and efficient condition is the social choice represented by point g  If other interest group C is able to reach a rent transfer harming groups A and B, their utilities will be diminished in a magnitude that exceeds the gain to C  It results in a lower production possibilities curve P’P’ and a lower social indifference curve I’I’ implying a new Pareto Optimality condition of social choice represented by point g’  There has been a welfare loss affecting the entire society: voters (consumers) and interest groups (producers) Matteo Marcantognini Palacios MFIESA2009
    • “The Chicago Model: Stigler, Posner, Barro, Peltzman” 1962-1976Propositions: „Government is the supplier of regulatory services and the regulated industry itself is the source of demand for regulation, not the public interest ‟ „In exchange, the regulated industry can offer legislators campaign contributions, votes of employees and can promise highly remunerative employment to the regulators‟ „The source of the principal-agent model conflict rests solely on the divergence of utility incomes arising from overproduction of government services and paid for by taxes on all citizens‟ „The major political problem for regulators is to design “efficient” regulation‟Predictions and Prescriptions: „The question this theory suggests is how to design institutions to arrest or at least control the tendency of regulation to grow solely for the mutual benefit of regulator and regulated‟ „The goal is to prevent legislators from succumbing to the blandishments of interest groups for personal monetary gain‟ „Regulators must respond to demands of consumers as well as the regulated‟Critiques: „The theory cannot predict precisely which industries will be regulated, does not explain deregulation, and its chief predictions are either tautological or are not borne out empirically‟ „The theory asserts a strangely passive pattern of behavior by regulatory agencies in the face of significant opportunities to do better‟ Matteo Marcantognini Palacios MFIESA2009
    • The Chicago Model: Vote Maximization and Government Choices Intuitive Analysis  M1, M2 and M3 are the „isovote‟ curves (M1 represents more votes than M2, and so on)  PP is the potential profit curve, the function that represents the rent interest of industries  Combination T is chosen by a vote maximizing regulator, with observed price P2 between monopoly price P* and the efficient price P1  If the industry improves its costs there may be a shift in the potential profit curve to P’P’ that should lead regulators to select combination K, associated with the lower and efficient price P1, a Pareto superior move since consumers pay lower prices, the industry obtains higher profits, and the regulators gain more support from each group than would be obtained at T Matteo Marcantognini Palacios MFIESA2009
    • “Interest Groups and Rent Seeking: The Virginians” Buchanan, Tullock, Krueger, Tollison, McCormick, Shuggart, Crain, Anderson, 1962-1988Propositions: „Interest Group Theory of Government and The Demand and Supply of Wealth Transfers: government output and growth are driven by the benefits and costs that citizens confront in using the machinery of government to increase their wealth‟ „Rent seeking is for individuals a highly rational and predictable political choice‟ „Rent seeking is usually defined as the political activity of individuals and groups who devote scarce resources to the pursuit of monopoly rights granted by governments‟ „The basic propositions of rent-seeking theory are (1) that the expenditure of resources to gain a transfer is itself a social cost and that (2) the resulting market privileges or rents represent a loss on consumers and taxpayers‟Predictions and Prescriptions: „The intensity with which rents are sought by citizens or officials depends on the size of the rents and the number of prospective competitors‟ Political efficiency and economic efficiency are much more likely to conflict rather than coincide: self- regarding activities of special groups generally cannot be balanced by encouraging more to be organized worsening rather than improving the situation „The only means to reduce wasteful rent seeking is to deny government actors the capacity to create rents in the first place through constitutional prescriptions‟Critiques: „Orthodox advocates of “interest group liberalism” have argued that valuable information services provided by interest groups outweigh their significant distortions of the market and continued exploitation of consumer and taxpayer‟ „According to them, the formation of interest organizations is merely the most efficient means of ensuring that all voices are heard‟ Matteo Marcantognini Palacios MFIESA2009
    • “Rent and Rent Seeking: A Virginian Primer” Intuitive Analysis  Propositions of rent-seeking theory are succinctly depicted by this figure derived from Harberger, where triangle ABC constitutes the social welfare loss while the box PmPcAB describes the magnitude of the transfer of wealth from the consumers to the rent seeker  Gordon Tullock considers that the latter rectangle constitutes a waste so that the total loss to society is the entire trapezoid  These losses exceed the gains that might have been obtained by the rent seekers Matteo Marcantognini Palacios MFIESA2009
    • “The Budgetary Vote Calculus” Intuitive Analysis  The goal is to balance votes won for each dollar spent against votes to be lost by new taxation and regulation  In Panel A the marginal vote gains from two different expenditures EA˂EB must be equal and the dotted horizontal line represents the equality MVGA=MVGB of vote gain of the two budgetary functions  Similar logic is depicted in Panel B, with taxes TA˂TB and the marginal votes lost MVLA = MVLB  If the budget (E*A+E*B) = (T*A+T*B) remains balanced, MVG* = MVL*  This is very different, however, from saying E*A= T*A and E*B = T*B  While relatively little empirical work has been done to test this basic vote calculus, observed behavior appears consistent with this analysis Matteo Marcantognini Palacios MFIESA2009
    • “Politics of Welfare Improvements” Intuitive Analysis  Suppose two parties are on the frontier at P, a Pareto optimal position  Then suppose that B is able to have a rent-creating proposal (tax exemption) enacted that increases B‟s income while reducing that of A by a still larger amount  If A can also obtain rent legislation (subsidy), it is possible that a new distribution will occur at E  If so, it is now possible for A and B to improve their respective incomes by agreeing to remove their sources of unequal gain and make a Pareto move back to P  Both B and E are inferior positions because they enable both to be better off on or near the frontier Matteo Marcantognini Palacios MFIESA2009
    • “ Graphics of Income Tax Reform” Intuitive Analysis  The demand for tax privileges is assumed to be fixed and described by curve DD, while the supply offered by legislators is determined by statute  Before a tax reform act, S1 the amount of privileges is extremely generous but inelastic  In order to change the quantity supplied, it is necessary to pass a whole new regime to shift the supply curve left to S2  This reduction in privileges increases their political value at the margin, resulting in intensified lobbying and leading to a slow shift of the supply curve back toward S1  Political “rent races” can be reduced in frequency and magnitude once we recognize the role of government as the constitutional supplier of rents Matteo Marcantognini Palacios MFIESA2009
    • “Chicago (Reprise): Variations on the Theme” 1978-1985Propositions: „Becker‟s model relies on the tools of general equilibrium and the real insight is that self interest dictates inefficiency and that waste cannot be an equilibrium phenomenon in the market with or without government intervention‟ „The Becker model is further constrained by the important assumption that rent seeking is conducted under zero-sum conditions…: expenditures must be balanced by tax revenues‟ „Groups that are more efficient, relative to other groups, are able to reduce their taxes or raise their subsidies… in such a manner that increases in deadweight costs may result‟ „Important Inequality: the larger the deadweight/efficiency loss of a proposal, the more losers lose compared to what gainers gain‟Predictions and Prescriptions: „In the limit (and in analogy with Coase Theorem) if organization and transaction costs are zero, only efficient policies will be enacted because politics that decrease inefficient rents will be politically popular‟ „Competitive process among pressure groups favors efficient methods of taxation‟ and „inducement to organize is a form of “countervailing power” that limits the power of pressure groups‟ „The greater the number of interest groups, and the more balanced the competition among them, the more efficient are political outcomes‟Critiques: Virginians reject the most important result in Becker‟s analysis even if it is better able to explain the movement toward deregulation The view that pressure groups maximize members‟ income is rejected by political scientists Matteo Marcantognini Palacios MFIESA2009
    • “Lobbying: Group Reaction Curves and Equilibrium” Intuitive Analysis  The political pressure exerted by each group is represented by an influence function that depends on the number of members and total political expenditures  The rent contest is a Cournot-Nash game, where each group takes as given the political efforts of other groups  MM’ is the reaction function of manufactures and FF’ is the one of farmers  Farmers employ lobbying resources L0f in order to increase tariffs  Then manufacturers respond by choosing point P0 on their reaction curve and increase their lobbying to L1m  This induces farmers to increase their effort to L1f and so on  A stable equilibrium at P* is the final result and the only position at which the groups actions are consistent with each other Matteo Marcantognini Palacios MFIESA2009
    • “Interest Groups in Equilibrium Models of the Policy Process” Uri Ben-Zion et al (1974-75): Positive model of interest group influence on a legislator‟s policy platform; there is a conflict between serving one‟s geographic constituency for votes and serving interest groups in exchange for money needed to campaign and win those votes; the additional electoral return from more funds is precisely offset by the electoral loss of votes Denzau and Munger (1986): An institutional approach where, (1) interest groups have less impact on issues where voters are well informed; (2) legislators choose committee assignments based on constituents‟ interest in that committee‟s jurisdiction; (3) committees possess monopoly proposal and gate-keeping power over legislation in the Congress Austen-Smith (1987): The most advanced research that pursues the modeling of political agents and presents a truly formal equilibrium treatment of legislators and interest groups in a democratic setting; voter preferences influence the effective capacity of interests to exert political pressure; voters perceive candidates only imperfectly, thus, campaign funds are used to clarify and reinforce the candidate‟s message, and candidates compete with respect to their abilities firmly to establish their positions in voters‟ mind Matteo Marcantognini Palacios MFIESA2009
    • Conclusions: Strengths and Weaknesses of the economic approach to the study of interest groups The strengths of the economic approach are its ability to provide us with considerable insight into the process of group formation and maintenance The economic approach provides predictions about what are the likely outcomes of democratic politics, and how groups shape the process Groups are collections of individuals, who join and participate (or free ride) for individual reasons We cannot treat groups as organic entities, and any theory whose normative implications rest on such an assumption (as the pluralists did) must be critically reexamined Regarding the weaknesses of the economic approach, these models are abstract and formal, they may well leave out components of group formation, goal setting, and maintenance that are not mere details but are integral parts of the political process Matteo Marcantognini Palacios MFIESA2009