DP13843 "When Olson Meets Dahl": From Inefficient Groups Formation to Inefficient Policy-Making
Two conflicting interest groups buy favors from a policy-maker. Influence is modeled as a common agency game with lobbyists proposing monetary contributions contingent on decisions.
When the preferences of the group members are common knowledge,
groups form
efficiently and lobbying competition perfectly aggregates preferences. When those preferences are instead private information, free riding in collective action arises within groups. Free riding implies that the influence of a group is weakened and that lobbying competition imperfectly aggregates preferences.
By softening lobbying competition,
private information might also increase groups' payoffs and hurt the policy-maker.
Importantly, the magnitudes of informational frictions within each group are jointly determined at equilibrium.
We draw from these findings a number of implications for the organization of interest groups.
