Capture by Threat

Abstract

We analyze a simple stochastic environment where policymakers can be threatened by "nasty" interest groups. In the absence of these groups, the policymaker's desire for reelection guarantees that good policies are implemented for every realization of the shock. When pressure groups can harass the policymaker, good policies will be chosen for only a subset of states of nature, a result similar to those obtained in the literature on "delayed reform". In order to enlarge this subset, the public will often find it convenient to elect "strong" political leaders, increase the cost for the group of exerting pressure and provide rents to those in power. The last result could be used as an explanation for the existence of political parties. They play a role resembling that of the supervisor in the literature on collusion in hierarchical agency. The paper also helps explain why honest politicians may choose bad policies and why countries may get to be governed by "bad politicians".

Keywords: democracy, bad policies, capture, political parties

JEL Classification: D72, D78