In every society there are individuals and pressure groups who lobby for concessions from the administration. In Discussion Paper No. 289, Research Fellow Michael Beenstock analyses the case of a transfer payment that everyone in society can, in principle, receive, and which must be paid for by those who do not. The remainder of society must either attempt to secure the benefit for themselves as well a `bandwagon' effect or `protest', to prevent exploitation by the few.
The public is assumed to be heterogeneous: though they are all endowed with some propensity to seek rent, some are endowed with a greater degree of `aggression', while others are more `meek'. All the population receive the same disposable income; the additional benefit consists of a single, fixed sum, funded by a flat-rate poll tax. It is only conceded after sufficient pressure has been applied, that is when the aggression of those seeking the benefit exceeds bureaucratic resistance motivated by the desire to limit public expenditure. Once the most aggressive section of the population has succeeded in obtaining the benefit, however, this concession establishes a precedent which lowers bureaucratic resistance the bandwagon may start to roll. As successive groups join the bandwagon, two distinct cases emerge. In the `divergent' case, even the meekest can eventually extract the benefit and everybody's extra tax liability will be equal to the benefit. In the `convergent' case the bandwagon stops before all the public has joined it.
The `benefit cycle' may be defined as the period of time over which divergence is achieved and/or a tax `reform' occurs in which benefits are scrapped. Each member of the public calculates the present value of the net benefit they will receive over the entire cycle, less the extra tax burden. For the most aggressive this calculation is obviously positive; for the meekest it is negative; for those in between it may be either. Beenstock finds that a majority vote in favour of the bandwagon is only feasible when the population is not strictly heterogeneous, that is when some groups in the population have the same level of aggression and thus acquire the benefit simultaneously. If the population is strictly heterogeneous, rent-seeking is strictly consecutive, and the gainers can never out-vote the losers.
Beenstock also considers the circumstances under which, once the bandwagon has begun to roll, it may be halted by a democratic request for reform. Continuing to assume that revenues are raised by non- distortionary taxes, the majority against reform will actually increase as more people acquire the benefit. Reform can only occur when, in the divergent case, everybody receives the benefit. If the benefits are financed by distortionary taxes, however, reform does become possible. The bandwagon is less likely to roll in the first place, as distortionary taxes act as a disincentive to rent-seeking. Once the bandwagon has started to roll in the divergent case, tax rates are raised; the greater the tax distortions, the sooner the clamour for reform. In the convergent case, the outcome is uncertain: if the distortions are serious there will be a mandate for reform, whereas if they are relatively minor it may pay the majority to put up with them in return for the rent-sought benefits

A Democratic Model of the `Rent-Sought' Benefit Cycle
Michael Beenstock

Discussion Paper No. 289, March 1989 (AM)