Pay-to-play politics: Informational lobbying and contribution limits when money buys access

Abstract

We develop a game theoretic model of informational lobbying between two interest groups and a politician, in which the politician can require political contributions in exchange for access. The analysis considers three claims: (1) the rich have better access to politicians than less-wealthy groups, (2) this access advantage makes the rich better off and skews policy in their favor, and (3) contribution limits can reduce the rich group advantage and result in less-skewed policy. We show that the rich do have better access, with the politician always offering access to the rich groups and only sometimes offering access to the less-wealthy group. This does not, however, mean that the rich group is better off or that policy is biased in its favor. The politician sets access fees to extract the greatest amount of rent from the political process. When only the rich group has access, its expected benefit from gaining access is fully offset by its payment to the politician. In this case, the less-wealthy interest group who is not targeted by the politician is better off. Contribution limits decrease the politician's ability to extract rent, which improves the payoffs of rich interests and decreases politician payoffs. Finally, the paper presents a novel benefit of contribution limits: they can encourage the formation of lobby groups or the search for evidence, which results in more evidence disclosure and better policy.

Introduction

Special interests often provide political contributions in an effort to gain access to decision makers. Access allows one to present information or arguments in favor of a preferred policy. Contributions are typically not provided in a quid pro quo exchange for policy favors. These statements not only summarize the views of interest groups and policy makers (e.g., Herndon, 1982, Schram, 1995),² they are strongly supported by the empirical evidence (e.g., Langbein, 1986, Hall and Wayman, 1990, Milyo et al., 2000, Ansolabehere et al., 2002, Clawson et al., 1992, Wright, 1990). Even advocates of campaign finance reform argue that the current system of money in politics is unfair because the rich have better access to politicians than the poor (Makinson, 2003).³ Although there is substantial evidence that political contributions help secure access to politicians, the majority of the theoretical literature on lobbying does not incorporate access, instead assuming that money directly or indirectly buys policy favors.

We develop a game theoretic model of informational lobbying between two interest groups and a politician, in which the politician can require political contributions in exchange for access. Access allows an interest group to present verifiable evidence to the politician about the benefits of its preferred policy.⁴ Within this framework, our analysis focuses on the impact of interest group wealth differences. We consider three claims: (1) the rich have better access to politicians than a less-wealthy group, (2) this access advantage makes the rich better off and skews policy in their favor, and (3) contribution limits can reduce the rich group advantage and result in less-skewed policy.

The politician awards access in a way that maximizes the amount of rent she can extract from the political process.⁵ In equilibrium, the politician always prefers to offer access to the rich interest group. Only when the probability that the relatively poor group has favorable evidence is sufficiently large will the politician also offer it access. This means that the politician often excludes the poor group and never excludes the rich group from the political process, supporting the claim that rich groups tend to have better access to politicians.

Payments collected from the rich interest group are maximized when the politician implements the rich group's policy if and only if the rich group presents favorable evidence. In this case, the politician gives the “burden of proof” to the rich group and the policy choice is completely independent of any action taken by the other group. Although the rich group is included in and the poor group excluded from the political process, the rich group tends to be worse off than the poor group in equilibrium. This is because the politician sets the access fee so high as to fully extract the rich group's expected rent from gaining access. The poor group, who is not targeted by the politician's efforts to extract payments, tends to be better off.

Including both groups in the political process decreases the expected payment from the rich interest group, and increases the expected payment from the poor group. The politician only prefers to include both groups when the poor has a sufficiently large probability of favorable evidence (and thus being willing to pay for access). When this is the case, the politician prefers to give the “benefit of the doubt” to the rich interest group, implementing the rich group's preferred policy unless only the poor group provides favorable evidence. When the poor group is included in the political process, it becomes a target of the politician's efforts to extract payments, has a lower probability of its policy being implemented, and tends to be worse off than if it was excluded. The rich group, on the other hand, is better off when it is not the only group included in the political process.

The analysis illustrates a flaw in common intuition about the benefits of political access. One may believe that an interest group will be better off when the politician offers it access. When the politician sets access fees to extract the maximum payments from interest groups with access, this is not the case. The rich group tends to be better off and the poor group worse off when the politician offers access to both groups rather than just the rich group. Additionally, we find no theoretical support for the claim that better poor group access makes it less likely that policy is biased in favor of the rich interest group. In fact, the opposite tends to be true, with the politician more likely to implement the rich group policy when she includes both groups in the political process (in which case, she gives the benefit of the doubt to the rich group) than when she excludes the poor group (and assigns the burden of proof to the rich group).

Next, we consider the impact of political contribution limits. Limits decrease the wellbeing of the politician not because they result in less lobbying or worse policy, but rather because they limit politician's ability to extract payments from special interests. For the same reason, limits tend to benefit rich interest groups. The analysis illustrates how, contrary to popular belief, contribution limits can make poor special interests worse off. This is because a contribution limit reduces the expected difference between rich and poor group contributions, and can result in the politician including both groups in the political process and setting fees to fully extract any benefit the poor group expects from access. We also show, however, that there are situations in which sufficiently low contribution limits benefit both special interest groups. In such settings, the politician is worse off because she can capture less rent; however, her ability to identify and implement good policies is unchanged.

Campaign finance reform advocates often argue that contribution limits help level the playing field between rich and poor special interests, and reduce the rich-interest bias in the political process. Our analysis shows that limits can increase the probability that poor groups receive access. But, improved access does not imply that the poor group is better off, as a limit may cause the politician to focus her rent seeking efforts on extracting the maximum payment from the poor group. Furthermore, we show that when money buys access (rather than policy favors) a limit does not increase the likelihood that the politician implements good policy. If a contribution limit makes less-wealthy interest groups better off or decreases political bias in favor of rich groups, then it is due to factors outside of our model, not by decreasing the rich group's access advantage. To illustrate how a limit may improve the quality of the policy outcome, we consider an extension in which interest groups decide whether to form a lobby presence prior to the politician announcing access fees.

One may interpret an interest group's decision about whether to form a lobbying presence as a choice of whether to establish an office in Washington, or whether to search for evidence. In the game with endogenous lobby formation, the politician is able to offer access to an interest group only if it forms. In the absence of a contribution limit, neither interest group will form since they recognize that the politician will react to their formation by setting access fees to extract the maximum payment through the lobbying process. If an interest group forms, it becomes the target of the politician rent seeking efforts, and in equilibrium will be worse off than if it did not form in the first place. By committing to a contribution limit, the politician effectively commits to constrain her ability to extract payments later on. Only when the politician commits to a low-enough contribution limit do interest groups find it worthwhile to form. In the absence of a contribution limit, the politician collects no payments and chooses policy without observing any evidence from the interest groups. A contribution limit, by encouraging lobby formation, increases expected payments, results in a more informed politician and improves policy outcomes. This is the first paper we are aware of to highlight this benefit of contribution limits.⁶

Our analysis considers an aspect of political contributions and lobbying that has largely been overlooked in the literature. We do not suggest that gaining access to lobby a politician is the only reason for making contributions, or that contributing is the only way to gain access to a politician. In many cases, e.g., on issues where a politician's policy preferences are known, interest group contributions may be primarily intended to support the election of a politician already predisposed in favor of the group's policy. In this case, the politician may still give interest groups access, but in order to use the group's expertise when drafting legislation or lining up support behind policy (similar to the lobbying as legislative subsidy model in Hall and Deardorff, 2006) rather than to learn about the issue. We suspect that lobbying to present evidence and lobbying as legislative subsidy both play important roles in US politics, with the more-appropriate description of access depending on the issue and whether a legislator already has a firm preference over the policy outcome. In other settings, access itself may be unnecessary for conveying evidence to a politician. When evidence is straightforward and easily conveyed (e.g., when evidence is simply made up of the most recent poll numbers about constituent support for a policy), a politician may be unable to prevent interest groups without access from conveying their evidence. Our analysis is most-applicable to evidence complicated enough that it takes a conscious effort to verify its source or understand what it means about the best policy.⁷ For these reasons, our framework is less applicable to hot issues such as abortion on which people have well established positions, and more applicable to technical issues such as industry specific regulatory, tax, or trade reforms.

In the next section, we review the relevant literature. Section 3 describes the model in detail, and Section 4 solves the game. Section 5 allows for various extensions of the model, starting with the incorporation of a contribution limit into the lobbying framework (Section 5.1) and then considering whether contribution limits can encourage lobby groups to form (Section 5.2). Section 6 concludes the paper with a discussion of the results, policy implications, and potential extensions of the model.