The Economics of Special Interest Politics: The Case of the Tariff

Abstract

This paper investigates the interaction of politicians and special interest lobbies. The goal is to model the equilibrium levels of redistributive policies such as taxes, subsidies, tariffs, and regulatory decisions. The model is applied throughout to the setting of tariffs. By contributing to political campaigns, special interest lobbies generate economic returns: higher tariffs generate revenue for import-competing industries through higher product prices, higher milk support prices raise dairy farm income, and so forth. The lobby invests to maximize these net economic returns. In evaluating their chances of election, politicians weigh the favorable effects of special interest money against the unfavorable association with the lobby and the social cost of the redistributive policy. Section I explores the lobby's problem: it describes a formalization of Mancur Olson's discussion of the voluntary provision of public goods and optimal contributions by lobbies to political campaigns. Section II describes determination of the equilibrium tariff positions of each politician in a political campaign.