Effort and Performance in Public-Policy Contests

be unambiguously interpreted as a more restrained or a less restrained government
intervention. In these cases the effect of a change in I on the stakes-asymmetry
depends on the relationship between the elasticities of the stakes with respect to I.

η_L

Specifically, the effect of a change in I on nL∣nH depends on whether--- is greater

η_H

∂n_j I

or smaller than 1, where η =— --, j = L, H. In a type (iv) reform the asymmetry

^j ∂I n_j

η_L

in the stakes is positively related to a change in I if ---<1. In a type (v) reform the

η_H

η_L
asymmetry in the stakes is positively related to a change in I if —>1.

η_H

Usually, a change in public policy affects the stakes of the two contestants. The
applicability of the corresponding reforms of type (i), (iv) and (v) is illustrated by the
following examples.

Monopoly price regulation: Several authors have pointed out that consumers oppose
government protection of a monopoly in attempting to defend their surplus, Baik
(1999), Ellingsen (1991), Fabella (1995). The government is assumed to make a
binary decision: regulating the monopoly or not, that is, force the firm to charge the
competitive price or let it charge the profit-maximizing monopoly price. In this
example therefore the firm is the LB player and the consumers’ representative is the
HB player. A change in the proposed price positively affects the stakes of both
players, provided that the monopoly price ranges between the competitive price and
the profit-maximizing monopoly price. Under this example the reform is of type (iv).
If the monopoly price is restricted to the range of prices exceeding the profit-
maximizing monopoly price, then a change in price inversely affects the firm’s stake
and positively affects the consumers’ stake. In such a case the example of monopoly
price regulation is a type (i) reform where i=H.

Public-Good Provision: The government considers building a park on the border of a
residential neighborhood. In order to finance the project, a general tax is levied on all
residents of the country who may benefit from the provision of the proposed park. In
addition to the tax, the local residents, the individuals who reside close to the park, are
subjected to another “tax”: the negative externalities (increased congestion, noise,
etc.) associated with living close to a public park that attracts a large number of

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