We first present the general framework of binary public-policy contests with
two possible states of nature (approval and rejection of the proposed policy) allowing
the general contest success functions axiomatized by Skaperdas (1996). This
framework has numerous possible applications such as contests on the approval or
rejection of a proposed minimum wage, monopoly regulation, tax reform, protection
by tariff or some new environmental policy. The rest of the paper is then devoted to
the comparative-statics properties of the public policy contest and, in particular, to the
clarification of the role of three types of asymmetry between the contestants on the
sensitivity of effort and performance to the proposed public policy.
Changes in the asymmetry between the contestants can give rise to perverse
incentives for a politician who designs a contest. Baye et. al. (1993) have shown that a
politician wishing to maximize political rents may find it in his interest to exclude
certain lobbyists from participation in the lobbying process - particularly lobbyists
valuing most the prize - because this increases the lobbying efforts of the remaining
contestants. More recently, Che and Gale (1998) have proved that asymmetric limits
on exerted effort can also have the effect of increasing the total efforts of the
contestants. We show that in a public-policy contest, under certain conditions of
asymmetry between the contestants, a more restrained government intervention that
reduces the prizes of the two contestants has the perverse effect of increasing their
total exerted efforts.
In section II we introduce the public-policy contest. In section III we present
the function that generates the prize system (the stakes) of the contest and illustrate its
applicability. Section IV contains the comparative statics analysis that focuses on the
effect of changes in the proposed public policy on the equilibrium asymmetries
between the contestants and, in turn, on the equilibrium effort of the interest groups
and on their probability of winning the contest. Section V contains brief concluding
remarks.
II. The Public Policy Contest
In our contest the players are two interest groups that are differently affected by the
approval and rejection of a proposed policy. In general, one group derives a higher
benefit than the other from the realization of its preferred policy. We therefore refer
respectively).