increases the benefit of the producer from the approval of the proposed change in the
degree of protection he enjoys. The proposed reform is of type (iv) and, subject to the
required modifications in the interpretation of the LB and HB players, the conclusions
obtained in this example are similar to those of the first example. 9
Clearly, numerous other applications come to mind. In fact, any setting where
public policy affects the payoffs of two agents (interest groups), such that one agent is
interested in the approval of the proposed policy and the other agent supports the
rejection of that proposal can serve as an illustration to our model. One can easily
construct other examples assuming, for example, that the policy instrument is the
quality of a public good provided by the government, the degree of privatization of a
particular publicly-owned company or any control variable that results in income
transfer from one agent (interest group) to another.
IV. Public Policy, Efforts and Winning Probabilities
The effort exerted in the public-policy contest deserves attention because it can be
interpreted as social costs and, therefore, serve as a measure of inefficiency.
Understanding how public policy affects this effort, which is often referred to as rent
dissipation, is the main goal of the proposed theory of public-policy contests.
By differentiation of the first order conditions (see (4)), we get that the Nash
equilibrium efforts satisfy the following conditions:
(6)
|
∂∆i |
∂∆j |
∂∆ j |
∂∆i | |
|
∂ x * i |
= ∂xj |
∂I |
dx j |
∂I |
|
~∂Γ |
∂∆i |
∂∆j |
∂∆ j |
∂∆i |
|
∂xi |
∂xj |
∂xi |
∂xj |
∀i≠ j, i,j=L,H
We thus obtain that:
9 If the policy instrument is a protective general tariff - which is imposed on all imported products including the
imported inputs, the representatives of the local producers and the consumers are, respectively, the LB and HB
players. In such a case, rejection of a proposed increase in the tariff increases the net benefit of the local
producers. Approval of such a proposed increase in the protective tariff may increase or decrease the benefit (the
rent) of the local producers. The latter possibility occurs when production costs become sufficiently high due to
the increased tariff on the imported inputs. Under this latter possibility, the proposed reform is of type (i).
Otherwise we are back to a type (iv) reform.
10