Lobbying diverts resources from productive to purely redistributive purposes and often biases decision-making away from socially optimal policies. In Discussion Paper No. 807, Research Fellow Michael Rauscher shows that the latter effect can increase social welfare when it just offsets distortions that arise if the government seeks to maximize social welfare in an international policy game (without lobbying) through the use of inappropriate policy instruments. These may include the application of domestic regulation to achieve trade-related policy goals, for example when free trade agreements preclude `appropriate' measures such as tariffs, quotas and taxes on the repatriation of profits.

Rauscher's model has two countries. Private capital is internationally mobile, and both governments provide optimal amounts of another, immobile factor which may be viewed as an infrastructure good or a set of property rights over natural resources to maximize national income (including income earned by owners of capital employed abroad). They choose the supply of the public input to achieve cost-effective domestic production and also seek to influence the rate of return to capital. This leads to a prisoner's dilemma, as the capital-exporting country provides too much of the public good and the other provides too little.
Rauscher maintains that this may be remedied by lobbying. Unions that oppose unemployment, capital owners that seek to raise their incomes, or a public administration that derives legitimacy from close involvement in the economy will all introduce an upward bias into the provision of the public good. Such lobbying in the country providing `too little' will also raise capital productivity and hence the income of capital owners in the country providing `too much'. The latter may also reduce its supply if such lobbying reduces pressure on the repatriation of capital. Rauscher cautions, however, that the waste of resources diverted from productive activities will reduce any welfare-improving effects of lobbying.

Provision of Public Inputs and the Effects of Successful Lobbying in Open Economies
Michael Rauscher

Discussion Paper No. 807, July 1993 (IT)