Reform for Sale: a Common Agency Model with Moral Hazard Frictions

Abstract

Lobbying competition is viewed as a delegated common agency game under moral hazard. Several interest groups try to influence a policy-maker who exerts effort to increase the probability that a reform be implemented. With no restriction on the space of contribution schedules, all equilibria perfectly reflect the principals’ preferences over alternatives. As a result, lobbying competition reaches efficiency. Unfortunately, such equilibria require that the policy-maker pays an interest group when the latter is hurt by the reform. When payments remain non-negative, inducing effort requires leaving a moral hazard rent to the decision-maker. Contributions schedules no longer reflect the principals preferences, and the unique equilibrium is inefficient. Free-riding across congruent groups arises and the set of groups active at equilibrium is endogenously derived. Allocative efficiency and redistribution of the aggregate surplus are linked altogether and both depend on the set of active principals, as well as on the groups size.

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Reference

Perrin Lefebvre, and David Martimort, “Reform for Sale: a Common Agency Model with Moral Hazard Frictions”, TSE Working Paper, n. 23-1419, March 2023.