Insuring Legislative Wealth Transfers: Theory and Evidence

Abstract

The interest group theory of government assumes that the state’s primary purpose is to facilitate wealth transfers between special interests. The values of the transfers depend on their durability, which can be increased by mechanisms that raise the cost of repealing them. Nonetheless, such mechanisms cannot function perfectly, and, thus, uncertainty surrounding their durability remains. We argue that the uncertainty could be mitigated by an insurance mechanism that compensates interest groups if other durability-enhancing mechanisms fail. To illustrate how such an insurance mechanism works, we rely on the 2014 settlements between the Department of Justice and Bank of America and Citigroup, respectively, which required both banks to donate to housing-counseling organizations whose funding Congress had reduced three years earlier.

Keywords: Durability, Interest Groups, Political Exchange

JEL Classification: D72, H11, P16