On the Welfare Consequences of Political Activity

When economic actors are also allowed to become politically active, perhaps to influence a government price policy, they face decision problems with essentially simultaneous political and economic features. If, in addition, two groups struggle to pull the administered price level in opposite directions, an important strategic component is introduced. On two levels, then, such situations depart from the competitive economy framework of Arrow and Debreu. The model of this paper is designed to reconcile the general equilibrium model with politically active interest groups. This model is then used to assess the welfare consequences of such lobbying activity. We find that very often a lobbying program with price distortions is not the best means for regulating these economies. However, there may be cases in which no alternative policy could achieve the outcome resulting from the lobbying program. Keywords: Political economy, lobbying behavior, rent-seeking, distortionary policy.

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Working or Discussion Paper
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Bulletin 89-6

 Record created 2017-04-01, last modified 2018-01-22

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