Relational Political Contribution under Common Agency

• Date: 01 April 2017
• Published date: 01 April 2017
• Author: AKIFUMI ISHIHARA
• DOI: http://doi.org/10.1111/jpet.12215

RELATIONAL POLITICAL CONTRIBUTION UNDER COMMON AGENCY

AKIFUMI ISHIHARA

National Graduate Institute for Policy Studies

Abstract

Motivated by commitment problems of contracts in lobbying, this pa-

per studies a model of a repeated common agency where monetary

transfers must be voluntary. First, we show that the optimal punishment

strategy for a principal takes a two-phase scheme, which is similar to the

punishment characterized by Goldl¨

ucke and Kranz. Second, we inves-

tigate whether an outcome of standard menu auctions with binding

contracts can be supported by implicit contracts. We define the envi-

ronment to be more preference-diverse if an efficient decision is less

attractive to each principal. We show that the discount factor must be

high to support the outcome of the standard menu auction if the envi-

ronment is preference-diversified.

1. Introduction

The number of special interest organizations whose lobbying activities play an influen-

tial role in contemporary politics has been rapidly increasing.1Interest groups typically

contribute to politicians in order to access them and to affect their political decisions.

Politicians may respond to such influencing activities in order to secure their campaign

finances. Such interactions among interest groups and politicians can be described as

menu auctions. In the theoretical framework of menu auctions developed by Bernheim

and Whinston (1986b), bidders (principals) offer a transfer plan contingent on the

allocation of goods decided by the auctioneer (agent). In special interest politics, a

politician plays the role of the auctioneer whose policy decision can be influenced by

lobbying principals. Since the pioneer work by Grossman and Helpman (1994), there

have been many studies on buying influence analyzed using the menu auction model.

When we consider a lobbying contract, commitment to transfer schedules is po-

tentially an important issue that has not been explicitly considered in the literature. In

1The figures of organized interests in the United States are summarized in Grossman and Helpman

(2001, ch. 1).

Akifumi Ishihara, National Graduate Institute for Policy Studies, Tokyo, Japan (a-ishihara@grips.ac.jp).

This is a substantially revised chapter of my Ph.D. thesis, submitted to London School of Economics

and Political Science. I am greatly indebted to Leonardo Felli and Andrea Prat for their excellent su-

pervision. I am grateful to Erik Eyster, Hideshi Itoh, Thomas Kittsteiner, Michele Piccione, Francesco

Squintani, Yuichi Yamamoto, and participants at CTW Summer Conference 2007, The 15th DC Con-

ference, FESAMES 2009, and seminars at Hitotsubashi University, LSE, and the University of Tokyo for

comments and discussions. All errors are my own.

Received April 12, 2016; Accepted June 21, 2016.

C2016 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 19 (2), 2017, pp. 527–547.

527

528 Journal of Public Economic Theory

Bernheim and Whinston (1986b) and in many applied works on lobbying, a transfer

schedule offered by the principals is exogenously enforceable. However, an explicit lob-

bying contract is usually illegal. Since such a transfer contract in the context of politics

must be an informal agreement, the assumption of commitment becomes relevant. Re-

peated interaction may support informal agreements because of future punishment for

reneging on transfer promises.2Nevertheless, the punishing mechanism has not been

formally clarified in the literature. Furthermore, empirical evidence suggests that re-

peated interaction is not necessarily sufficient to support perfect commitment as in the

menu auction model.3Thus we must investigate under what conditions lobbyists can

commit to their contribution agreement in a repeated relationship.

To address these issues, our study takes the first step toward a formal analysis of po-

litical contributions that must be voluntarily transferred as a relational contract. More

specifically, we consider political contributions in an infinitely repeated game where

an agent (politician) makes a decision and principals (lobbyists) voluntarily make pay-

ments to the agent based on the observed decision in each period. After deriving some

results on stationary equilibria and the optimal punishment, we investigate the main

issue: Under what conditions an outcome in the menu auction model of Bernheim and

Whinston (1986b) can be supported by relational contracts in our model. We introduce

the concept of preference-diversity, which is related to the degree of attractiveness of

efficient decisions, and we argue that the discount factor must be high to support the

menu auction outcome when the principals’ preferences over the agent’s decisions are

diversified.

While the optimal punishment for the agent can be induced using a simple Nash

reversion, each of the principals is optimally punished by the two-phase scheme. More

specifically, in the initial period of the optimal punishment for a deviating principal, the

agent chooses a decision harmful to the principal, followed by a sort of sanction fine

transferred from the principal to the agent. After the initial period, the decision chosen

by the agent may be jointly beneficial for the players. This is similar to the punishment

strategy in Abreu (1986) and Goldl¨

ucke and Kranz (2012). We further characterize the

set of the payoffs of decision-stationary equilibria in which the agent chooses the same

decision repeatedly on the equilibrium path. We can then compare the equilibrium

payoffs in the static menu auction (SMA for short) with those of our relational political

contribution model (RPC for short).4Unsurprisingly, the comparison shows that it is

easier to support an SMA equilibrium outcome in the corresponding RPC when players

aremorepatient.

More importantly, we show that a truthful equilibrium in SMA, defined by Bernheim

and Whinston (1986b), is less easily to be supported by an equilibrium payoff in the RPC

if the principals’ preferences regarding decisions are diversified in the following sense.

We define the environment to be more preference-diverse if changing an inefficient

decision to an efficient one5(i) increases the aggregate benefits less; and (ii) is less

2Grossman and Helpman (2001, p. 228) explicitly mention this assumption.

3McCarty and Rothenberg (1996) find from the data that in the United States, credible commitment

of campaign contributions by political action committees has been significantly weak. Snyder (1992)

finds that representatives in the U.S. House of Representatives receive more campaign contributions if

they are expected to be in office for a longer term, indicating that monetary transfers in lobbying are

sensitive to the length of their relationship.

4By “menu auction,” we mean an environment where binding contracts are allowed. By “political con-

tribution,” we indicate the repeated environment without binding contracts.

5An efficient decision is defined as a decision that maximizes the total payoff among the principals and

the agent.