Policy Reform and the Free Rider Problem

Abstract

We investigate policy reform in a model in which there are both rent seeking and lobbying activities. These two activities involve similar skills, so a reform which reduces rents will cause a shift into lobbying. Also, lobbying is subject to a free-rider problem, so the marginal return to the industry from lobbying may greatly exceed an individual firm's return to lobbying. Thus, the shift into lobbying which results from a reduction in available rents may lead to a large increase in transfers to the lobbying industry. Under some circumstances, it is possible for a reform which reduces available rents to increase the total of rents plus transfers to the industry.

Keywords: Lobbying, Rent Seeking, Reform, Free-Rider Problem

JEL Classification: D72