Political Agency and Implementation Subsidies with Imperfect Monitoring

Voters are frequently ill-equipped to monitor politicians’ actions. Politicians are expected to implement projects, whose benefits sometimes partially accrue to interest groups and not entirely to voters. Interest groups thus have an incentive to affect which projects politicians implement, by providing implementation subsidies to lower the cost of policy-making that has to be borne by politicians. This paper shows how these considerations interact in a two-period political agency model with moral hazard and adverse selection. I study how the involvement of interest groups in the policy-making process can affect voters’ welfare. I also show why voters might rationally not perfectly monitor politicians in the presence of interest groups that might capture projects’ benefits and affect policy-making.