Lobbying and Corruption

Transcription

1 Lobbying and Corruption Dr James Tremewan Lobbying in Brussels / The Tullock Model

2 Lobbying in Brussels 2/27

3 Lobbying in Brussels Lobbyists in Brussels: who are they? 1 3/27 Precise data is hard to come by, but estimated: 15,000-30,000 actively employed to influence EU institutions. Two-thirds work for business interests (the rest for civil society and trade unions). Corporate lobbying well in excess of one billion euros. In-house lobbyists: 500 corporations have their own lobbying offices: BP, Rolls Royce, E.ON... 1,500 industry lobby groups: International Association of Amusement Parks and Attractions, European Chemical Industry Council (over 170 employees representing 29,000 companies)... NGOs: Amnesty International, The Smoke Free Partership, Transgender Europe... For-hire firms: Think tanks; Public relations and law firms. 1

4 4/27 Lobbying in Brussels Lobbyists in Brussels: what do they do? Work in advisory groups (Set up by EC in early stages of legislation development and policy initiatives to provide technical advice). Draft amendments to legislation (sometimes used as is by MEPs). Cultivate informal relations with MEPs: cocktail receptions, expenses-paid trips, dinners.

5 Lobbying in Brussels Lobbyists in Brussels: problems and safeguards Fine line between gifts and bribes, lobbying and corruption. Cash-for-influence scandal: Sting operation by the Sunday Times in March MEPs invited to assist fake lobby firm for 100,000 per year. 14 agreed to meet, and three appeared to accept: Ernst Strasser (Austria), Zoran Strasser (Slovenia) resigned; Adrian Severin (Romania) did not. Transparency of lobbyists: Register of lobbyists 2 including who they work for and how much they spend. Currently voluntary, but plans to make it compulsory by Transparency of officials: European Commissioners and MEPs must declare financial information. But no evidence this is systematically verified 3. 2 ec.europa.eu/transparencyregister 3 areas/eu-integrity-study 5/27

6 6/27 Lobbying: what is it all for? As we have seen, a huge quantity of resources is put into lobbying EU institutions (the same goes for national institutions all around the world... Washington has an even higher density of lobbyists.) NGOs may highlight environmental problems, human rights causes, etc. Much industrial lobbying is about obtaining or defending economic rent: The big industrialists grumble that the politicians don t give them enough protective tariffs, and the politicians grumble about industry for not coming up with enough money for their election campaigns. Count Leinsdorf in The Man Without Qualities by Robert Musil.

7 Price. A MC+tariff... B MC.. C... Q tariff Q MC Quantity 7/27 International firms and domestic monopoly produce at cost MC. With no tariff: production at Q MC, total surplus = A + B + C. With tariff: production at Q tariff, total surplus = A + B. B is just transfer from consumers to domestic monopoly, so welfare loss of tariff to country = C (?)

8 Price. A MC+tariff... B MC.. C... Q tariff Q MC Quantity 8/27 How much would monopoly spend on lobbying for tariff? If lobbying activities are assumed wasteful, welfare loss to country could be up to B + C. The Tullock model considers firms/groups competing for economic rent and asks what level of resources can we expect to be wasted on lobbying.

9 9/27 The Tullock model Two firms are lobbying to receive a political prize worth Q (e.g.. Each firm chooses simultaneously how much to spend on lobbying (x 1, x 2 ). The probability with which firm i wins the prize is π i (x i, x j ) = { 1/2 if xi = x j = 0 x R i x R i +x R j otherwise, where R > 0 determines the expected returns from lobbying: R = 0 lobbying pointless. R = biggest spender wins for sure.

10 10/27 The Tullock model For 0 < R 2, there is a unique symmetric pure strategy Nash equilibrium. Each firm maximises x R i x R i + x R j Q x i First order conditions: QRx R 1 i xj R (xi R + xj R ) 1 = 0 2 Solve for x i, x j : x i = x j = QR 4

11 11/27 The Tullock model For 0 < R 2, the bigger R, the more resources are wasted in lobbying: R = 1 half the prize is wasted. R = 2 the whole prize is wasted! For R > 2 there are only mixed-strategy equilibria. For R = : Unique symmetric NE where both firms uniformly randomize over [0, Q]. Sometimes total spending is more than Q, sometimes less. Total level of spending is exactly Q on average.

12 How do buyers respond? Firms lobby for a monopoly position. If successful: Price increases from competitive level (P C ) to monopoly (P M ). Quantity decreases from Q C to Q M. Winning firm gains B, consumers lose B+C. Price. P M A... P C.. B C... Q M So what do consumers do? 12/27 Q C Quantity

13 Rent-defending Buyers 13/27 Not just firms but also consumer groups lobby for favourable legislation. Examples: Consumers International ( Free Software Foundation ( European Beer Consumers Union ( How to model this? Value of prize is greater for consumers (B+C) than firm (B). Timing: Consumers may lobby at the same time as firms to prevent monopolization, or after monopolization to implement regulation. Key questions: Does the presence of rent-defending buyers increase or decrease wasteful lobbying? Does the timing of consumer lobbying affect social efficiency?

14 4 For more general results see Strategic Buyers and the Social Cost of Monopoly, Tore Ellingsen, American Economic Review (1991). 14/27 Davis and Reilly (1998) Do too many cooks always spoil the stew? An experimental analysis of rent-seeking and the role of a strategic buyer, Davis and Reilly, Public Choice, Environment with four sellers (value of prize=200) and one buyer (value of prize=400). Theoretical predictions derived for six different treatments. 4 Lottery (Tullock model with R = 1) or perfectly discriminating auction (R = ) Either no buyer (Baseline), buyer lobbies with firms (1-stage-with-buyer), or buyer lobbies after monopolist is determined (2-stage). Theoretical predictions tested in laboratory experiment.

15 15/27 Baseline lottery Seller s objective: π i = b i s b i, where s 1 = b 1 + b 2 + b 3 + b 4. FOC implies: b i = 200s 1 s , i {1, 2, 3, 4}. Solution symmetric, so s 1 = 4b i, and b i = Total lobbying expediture = 150, DWL = 200, so total social cost = 350.

16 16/27 1-Stage-with-buyer lottery Seller s objective: π i = b i s b i, where s 2 = b 1 + b 2 + b 3 + b 4 + b B (b B is buyer s bid). Buyer s objective: π B = b B s2 400 b B. Optimal bids: b i = 200s 1 s = 19.75, i {1, 2, 3, 4}. b B = 400s 1 s = Total lobbying expediture = , expected DWL = (200 x probability a seller wins), so expected social cost =

17 17/27 2-Stage lottery Backward Induction: Suppose firm i becomes the monopolist. Objectives in second stage: π i = b i b i +b B 200 b i. π B = b B b i +b B 400 b B. Optimal bids and expected profits in second stage: b i = 44.44; π i = b B = 88.89; π B = Objectives for firms in first stage: π j = b j s b j, j {1, 2, 3, 4}. Optimal bids in first stage: b j = 4.17, j {1, 2, 3, 4}. Total lobbying expediture = 150, expected DWL = 66.67, so expected social cost =

18 18/27 Summary Lotteries Baseline 1 Stage 2 Stage Seller bid /44.44 Buyer bid Total lobbying expenditure Expected DWL Expected social cost All Nash equilibria for perfectly discriminating auctions involve mixed strategies. Complicated, so forget about proofs in this course. PDAs Baseline 1 Stage 2 Stage Average seller bid /50 Average buyer bid Total lobbying expenditure Expected DWL Expected social cost

19 Experiments: Design In each of 24 sessions, five participants play one auction 15 times, then another 15 times. Designed such that each auction is sometimes first, sometimes second (to control for order effects ). In half the sessions the participants are experienced, i.e. they have already participated in a previous session. 19/27

20 20/27 Experiments: Design Participants given $6 at beginning of each sequence of games (plus $6 showup fee). At beginning of each auction, buyer determined randomly. Participants visually isolated and bids submitted anonymously (in baseline auctions the buyer does nothing). Bids collected by monitor and publically anounced. For lottery auctions, probabilities calculated, winning range from 0-99 announced for each bidder, and number drawn randomly to determine winner of prize ($2 for sellers or $4 for buyer).

21 21/27 Experiments: Results (Social Cost)

22 22/27 Experiments: Results (Social Cost) Across the six auction types, Nash equilibrium predictions correctly rank-order mean observed social costs. Social costs are lower in the baseline lottery than in the baseline perfectly discriminating auction. The addition of a strategic buyer reduces social costs. However, in all auction types, aggregate social costs substantially exceed Nash equilibrium levels. The social cost savings generated by introducing a buyer tend to be smaller than predicted. But experience brings things closer to predictions.

23 23/27 Experiments: Results (Bids)

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26 26/27 Experiments: Results (Bids) Overbidding is pervasive in all auction types. In contrast to social cost predictions, Nash predictions fail to rank-order bidding outcomes. Experience diminishes overbidding, and with experience, Nash predictions for sellers perform well. Buyers account for much of the total aggregate overbidding (probably because participants on average play only one out of five auctionss as buyer, so have less experience in that role).

27 Conclusion 27/27 In line with the theory, the experimental evidence finds that: The possibility of competing for rent is socially costly. A rent-defending buyer reduces social costs. Social costs are higher than predicted because of overbidding, but the discrepancy decreases with experience. Does it matter that the precise mechanism predicted by theory isn t accurate if the overall results are in line with the predicted effects? Consumer lobbies increase social welfare and benifit consumers. Why are they so few compared to corporate lobbyists? A firm faces a large gain for itself from lobbying. Although consumers as a whole have more to lose, for each individual this will be a small amount, and lobbying by one consumer has positive externalities for others: possibility of free riding.