Wk. 4 L.8 Collective Action and Rent Seeking + Regulation

What is the collective action problem?

Under what two conditions will group interest be achieved?

Large groups vs small groups?

-       Olson, Mancur. 1965. “ The Logic of Collective action.”

o   Even if it is in the self-interest of a group to engage in an action for the betterment of the group, it is not necessarily true that the group will engage in this action.

o   “Rational, self-interested individuals will not act to achieve their common or group interest unless there is coercion or a separate individual incentive to do so.”

o   Small groups are more likely to engage in collective action than large groups.

 

Issues with the collective action problem?

-       What is rational at the individual level?

-       Don’t contribute to the group and “freeride.”

-       But this makes the group worse off.

- If everyone acted “irrationally” the group would be better off.

Collective action failures?

What about the size of the group ?

-       Collective action failures = misalignment of private and collective incentives.

o   Private incentives virtually zero, but high incentive for group to act.

-       The larger the group gets, the larger this misalignment becomes.

o   The larger the group, the smaller the fraction of the total group benefit each person or subgroup receives.

o   Less likely the group actions will result in an optimal supply of the collective good

o   The larger the group, the larger the organizational costs.

What is Olson opinions on unions, Marx and special interests?

-       Labour unions

o   Coercion in the form of compulsory membership and/or violent threats to workers attempting to cross lines are essential for an enduring, stable union.

-       Marxist revolution

o   Rational for a worker not to engage in a proletarian revolution

o   They get the benefits whether they participated in the revolution or not.

-       Special interests

o   Small groups that represent the interests of a few like-minded firms.

o   More likely to engage in collective action because of smaller group size.

 

Example of Olsen’s special interests?

Example: housing, zoning, and political participation

-       Homeowners = small group with high economic incentives to participate in politics.

o   Large, tangible benefits (property value) from halting nearby development.

-       Renters = large group with lower economic incentives.

o   More housing will reduce rents in a diffuse geographic region in the long term.

-       Local politics in North America dominated by homeowners arguing for restrictions on housing development.

 

What is the tragedy of the commons?

Use Climate change as an example:

-       Limited common resource anyone can use.

-       Example: overfishing

o   Fisherman’s incentives = catch more fish.

o   Group’s interest = limit overfishing

-       How do we solve this problem?

o   Through coercion.

Climate change

-       Individual incentive = pollute!

o   High short-term financial incentives.

o   High costs of green production.

o   Higher prices for consumers.

-       Coercion.

o   Emissions caps.

o   Fines.

-       Incentives

o   Carbon taxes.

Subsidies.

What is Elinor Ostrom’s theory on coercion and collective action?

Olson’s theory contradicts what we see everyday.

-       People vote (without coercion).

-       People sometimes share and protect natural resources (without coercion).

-       But people also do free ride and/or don’t act collectively when they should.

“A substantial number of collective action situations are resolved

successfully.”

-       There is a “propensity to cooperate based on the development and growth of social norms.”

When does Elinor Ostrom’s theory hold?

-       Olson’s theory holds in many cases, but not all.

-       Rational behavior may hold in competitive market scenarios, but not necessarily collective action scenarios.

o   In lab experiments:

  Subjects contribute to the public good, even when rational contribution amount is zero.

  Cooperation increases with belief in others’ cooperation and face-to-face contact.

  Groups like to punish free riders.

What does Elinor Olson put forth about conditional cooperators and willing punishers?

-       Conditional cooperators

o   People who will cooperative if others will reciprocate and continue to do so as long as a sufficient proportion of the others involved keep reciprocating.

-       Willing punishers

o   People who will punish freeriders verbally or through costly sanctions.

o   Can be conditional cooperators.

-       Conforming to social norms can also have value for individuals.

o   I might value cooperation in a prisoner's dilemma, even if there is no payoff.

Scarcity and collective action relationship?

How do you foster social norms when it comes to collective action?

-       Monitoring

o   Monitor those who do not contribute to the group or violate social norms, then sanction them when they are caught. Sanctions need not be monetary.

-       Social pressure and embarrassment (Gerber, Green, and Larimer 2008)

o   No coercion, no incentives, but there is monitoring, and maybe (social) sanctions.

-       Increasing perceived cost of abstention (Aytaç and Stokes 2019, Incerti 2024).

o   People experience discomfort from not participating when they feel like the stakes are high.

o   P = A – C + D_E where P is rewards from participation, A is cost of abstention, C is cost of participation, and D_E is social pressure.

-       Providing information about adherence to social norms only works when pro-social norms are high.

o   Informing people how common bribery is increases bribery. Informing them how rare it is decreases bribery (Corbacho, Gingerich, Oliveros, & Ruiz‐Vega 2016).

 

What is rent-seeking?

-       Confusingly named by Tollison (1967)

-       Obtain benefits (money, favorable regulations, etc.) through politics.

-       Gain wealth without gain in productivity.

o   Corruption

o   Lobbying

o   Etc.

-       Not a totally new concept

o   Smith talked about mercantilist interest group behavior.

o   Candle maker’s petition

What is corruption? + Rose-Ackerman’s definition?

-       “Abuse of public office for private gain.”

o   Does legality matter?

o   Public opinion or perceptions of what is corrupt?

o   Negative distortions?

-       Rose-Ackerman (2018): “Official…operates in his or her own interest in a way that undermines the program’s aims.”

o   “Officials who administer public programs without gaining personal benefits are not corrupt…

Even if the programs’ values are abhorrent… paying a bribe to undermine that law is still corrupt.”

What is petty corruption vs grand corruption?

Petty

-       Transparency International: “Everyday abuse of entrusted power by public officials in their interactions with ordinary citizens, who often are trying to access basic goods or services.”

o   Bribe to avoid speeding ticket, evade taxes, get an ID card (faster), etc.

o   Usually street-level bureaucrats.

o   Sometimes called a “harassment bribe” (Basu 2011).

Grand

-       Transparency International: “A systematic or well-organised plan of action involving high-level public officials that causes serious harm.”

o   Bribe to secure government contracts, purchase state-owned enterprises, obtain concessions for resource extraction, pass favourable regulations, etc.

o   Usually politicians.

How do you reduce corruption?

-       Electoral accountability?

o   Voters should hold policy makers accountable for their actions.

o   Information provision to voters should therefore decrease corruption.

o   Does it work this way?

In theory yes, in practice no

What actually works in reducing corruption?

-       Low political will to reduce corruption → those in power benefit from the current system.

o   Align incentives.

o   Example: politicians can benefit from reduced bureaucratic corruption.

-       E-governance

o   Moving service delivery online cuts out bureaucratic middlemen and speeds up or automates service delivery.

-       Transparency

o   E.g., require price of government services to be posted in office.

-       Procurement reforms

o   E.g., public, competitive, transparent bidding.

o   Price-gouging or kickbacks uncovered through divergence in prices or lack of competitive bidding.

-       Social audits

o   Give non-governmental actors tools to monitor. Easier than setting up internal anti-corruption agencies.

 

Regulations takes us back to?

-       Back to the principal-agent problem
Principal Agent
Government/legislators —> Regulator
Public —> Regulator
Regulator —> Firm
Public —> Firm

What is the classic view on regulation? Stigler, Becker, Peltzman

-       Stigler (1971): Regulations benefit large firms (not consumers) because producers organize better (than consumers and other members of society)—> (collective action problem)? Why?

-       Becker (1983): The interest group able exert the most pressure wins the support of the regulator. —> economic efficiency argument

-       Peltzman (1976): Legislators support producer protection if the gain in campaign support or votes from the producer is larger than the loss from angry consumers that occurs due to an increase in prices.

What is regulatory capture?

-       “Agency aligns itself with those it is supposed to regulate (Stigler 1971).

-        “Regulation is . . . directed away from the public interest and toward the interest of the regulated industry” (Carpenter and Moss 2014)

-       “Electorally sanctioned pro-business governance” (Carpenter 2001)

-       Classic view → collective action problem makes capture likely.

o   Today seen as too simplistic.

o   We know this is a risk, so we create institutions to mitigate it.

o   Politicians create regulatory agencies in response to public pressure.

 

Regulatory capture for Huntington?

Huntington (1952)

-       Interstate commerce commission → mission to “enforce national transportation policy.”

-       Railroads supported ICC and in fact wanted expanded powers.

o   Granted rate increases.

o   But also rates favourable to railroads and unfavourable to motor carriers.

o   Opposed anti-trust enforcement.

Issues with regulatory capture? Dillon et al 2018

o   “Define the EPA’s public interest by its statutory mandate to protect human health and the environment.”

o   “Shift away from a public interest in environmental health to the interests of the regulated industries (that are harmed by environmental protection)”

o   Political appointees (and who they meet with)

o   Lobbyists on scientific boards

o   Policy shifts away from protecting public health and environment

o   Budget cuts and reduced enforcement ability

Is favouring some firms rational?

-       Large firms get speedier approval of new drugs in the US.

-       But could be a rational learning process (Carpenter & Ting 2007).

o   More applications from large firms.

o   Most are reviewed and approved.

o   Regulatory decides firms need less scrutiny.

o   Regulator has worse priors about newer, smaller entrants.

Not an example of capture or favouritism – possess less information on smaller firms

What is the revolving door of regulatory capture?

-       Movement of individuals from government to the private sector and
from the private sector to government.

-       Many regulators either come from industry or end up there after their stint at a regulatory agency ends.

-       Does where regulators are selected from affect regulatory and/or economic outcomes? —> bias??

-       Worried about quid pro quo exchange.

What are the effects of the revolving door?

-       Lobbying revenue higher for ex-congressional staffers when former employer is in office (Blanes I Vidal et al. 2012).

-       Firms with CEOs in China's National People's Congress have higher stock prices and operating profits (Truex 2014).

-       Companies see stock price boosts when officers enter politics (Faccio 2006)

-       Politically connected firms more likely to receive bailout in a crisis (Faccio et al. 2006).

-       Firms with connections decrease lobbying spending (Lee and You 2020).

-       Having former bureaucrats on staff increases government loans received by private firms and contract values for nonprofits in Japan (Incerti 2024).

 

Should the revolving door be reduced?

-       It’s not as clear as you might think!

o   Revolving door may incentivize regulatory employees to be more stringent in their oversight to signal qualifications to potential employers (Che 1995).

o   Few experts in technical jobs/regulators such as nuclear engineering, biomedical engineering, etc.

Want hard worker to not be a pushover.

How to reduce revolving doors?

-       Cooling off periods

o   Different countries in Europe have different cooling off periods (usually 1-2
years).

o   Can differ for different jobs or sectors.

-       Advice bodies that must approve post-government employment.

-       Monitoring is difficult and requires mandatory reporting and enforcement of violations.

What are the newer approaches to regulatory capture?

Less stick, more requirements and public pressure

-       Management-based regulation

o   Monitoring, employee training, internal evaluation

o   Uses public shaming

-       Information disclosure requirements

o   Force companies to report publicly or to regulator.

o   No punishment for violations, but punishment for not reporting.

-       Voluntary programs and self-regulation

o   Educational programs, resources, awards, subsidies, etc. (carrot)

-       But risk that it is all “cheap talk.”

What is spontaneous deregulation?

-       Sometimes called “regulatory entrepreneurship”

-       “Ignore laws and regulations [that they view as]... unwanted holdovers from a bygone era not yet ready for their innovations.” (Edelman and Geredin 2016)

o   Increases consumer choice

-       Examples

o   AirBnB

  Hotel taxes, rental restrictions  distortion in housing market

o   Uber

  Taxi medallions, ignored accommodations for passengers with disabilities

o   YouTube

  Copyright laws (initially)-       Sometimes called “regulatory entrepreneurship”

What is the issue with regulation research?

 

Regulation research is hard —> hard to isolate effect and so hard to study regulation —> conversations occur behind closed door – what actually changes firm behaviour?

-       “Most daunting challenge is the study of outcomes.” (Carrigan and
Coglianese 2011).

-       Still true today

-       Very hard to get data on regulatory outcomes and what caused shifts

-       Huge exogeneity problems

Where qualitative research and investigative journalism are important.

Issues with rules and regulations of campaign finance?

Rules and regulations vary drastically by country:

-       USA:

o   Bans corporate donations, but “Super PACs” can raise unlimited sums, then advocate for or against political candidates.

o   Bans foreign donations, but foreign companies can form PACs and collect contributions from American employees.

-       France: bans donations from abroad but allows loans.

-       Conservative U.S. think tank gave the largest individual amount to a Dutch political party in 2015.

-       Japan

o   Contributions to individual politicians by corporations or labour unions prohibited.

o   But candidate can set up a support organization to manage campaign's assets, which people can donate to.

o   Corporations, industry organizations and unions can donate to political parties.

In many countries, majority of campaign finance comes from state subsidies.

What is lobbying?

-       Transfer of information in private between interest groups and politicians

-       Isn’t this a good thing?!

o   We want people to be able to inform their elected officials.

o   We want politicians to be informed about how people feel about their stance on an issue.

Lobbying in regards to information exchange and welfare enhancement?

-       Information provision/exchange?

o   And relatedly, about what you know or who you know (expertise vs. connections).

o   Blanes i Vidal et al. (2012) 23% decline in lobbyists’ revenue after former employer leaves office.

o   Lobbyists also tend to follow their connections across issue areas (Bertrand et al. 2012).

-       Welfare enhancing or welfare distorting?

o   Enhancing: mechanism to petition the government

o   Distorting: distorts public policy away from public good and toward concentrated economic interests.

o   Clear to public (53% of Americans think lobbyists “very serious problem”), less clear for academics.

-       Quid pro quo?

Does lobbying work?

Very hard to answer. But studies show positive returns to lobbying on:

-       Tariffs

-       Influencing regulations

-       Contract procurement

-       Effective tax rates

“Why is there so little money in U.S. politics” (Ansolabehere et al. 2003)

-       Huneeus & Kim (2019)

o   10% increase in lobbying produces a 3% increase in revenue.

Also decreases productivity of firms and misallocates resources