Dynamics of the Economics of Special Interest Politics

This paper derives the solution to differential games, when there are four sets of players, namely - two political parties (politicians), voters and a special interest group. The basic results are similar as Lambertini (2001, 2014). We find that, an open-loop equilibrium collapses to a closed-loop equilibrium. Therefore, the open-loop equilibrium is a sub-game perfect. Further, the private optimum is always higher than the social optimum in terms of the provision of the expenditure on public good. That is, if both the parties have access to public expenditure for the provision of the expenditure on public good they have the tendency to overspend and can incur higher deficits. Consequently, voters vote retrospectively to the party which overspend and results in higher fiscal deficits. Similarly, a larger private optimal regulatory benefit helps the political parties to receive higher financial contribution. Overall, the fiscal deficit in excess of certain level of threshold can create higher cost to the voters and hence the economy as the future tax and this is more so in the presence of special interest group.