On the existence and optimality of equilibria in lobbying economies

Suppose that members of a society are accorded status as both economic and political agents. If the polity responds to the same actors for whom economic policy matters, a simultaneity of political and economic determination is introduced. The first goal of the research presented here concerns the microeconomic question, How does an agent choose economic and political behavior simultaneously when his or her political activity has an explicit effect on the economic environment? The second is to determine conditions under which an equilibrium will exist in a generic strategic lobbying situation. The third is to discover the effect of lobbying behavior on society's welfare position. The model of the thesis begins with an exchange economy in which agents are asked to make economic and political decisions simultaneously. A government mechanism sets relative prices by law in response to donations by political interests whose stakes in the price level are diametrically opposed, trading with a larger world economy to clear the distorted domestic markets. The first result is the demonstration that under certain conditions on the economy, the model possesses a lobbying equilibrium. The welfare properties of this equilibrium are evaluated by comparing agents' utility levels at the lobbying outcome with those which would obtain in corresponding competitive economies. Both agents may be worse off with lobbying than without it, but one agent is sometimes better off with the lobbying program. Using cooperative game theoretic techniques, the potential for agents to gain by forming a coalititon and overturning the intervention policy is studied. The potential for the government to achieve an analagous improvement by implementing a tax/transfer scheme is also evaluated. It is shown that cases in which agents could help themselves by cooperating coincide precisely with cases in which the government could help them by replacing the price policy of the model with a tax/transfer policy. In order to investigate these welfare properties, and to draw conclusions about the relationships between agents' characteristics and the pricing rule, numerical experiments are carried out in which equilibrium outcomes are calculated for example economies.