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Endogenous market regulation in a signaling model of lobby formation

Francisco Candel-Sánchez () and Juan Perote-Peña
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Francisco Candel-Sánchez: Universidad de Murcia
Juan Perote-Peña: Universidad de Zaragoza

Journal of Economics, 2018, vol. 123, issue 1, 23-47

Abstract: Abstract This paper aims at explaining industry protection in a context in which the government cannot observe the state of market demand. We develop an asymmetric information model and use the tools of contract theory in order to understand (1) how the level of industry protection is endogenously determined, and (2) why some industries decide to engage in large lobbying costs to become politically active. Our model offers plausible explanations to phenomena such as the “loser’s paradox”, where weak industries receive the most protection although strong industries are the ones that spend more resources on lobbying activities. The model also allows for an analysis of the influence that lobbying costs have on the decision to organize actively as a lobby.

Keywords: Asymmetric information; Lobby formation; Signaling (search for similar items in EconPapers)
JEL-codes: D72 D82 D86 L51 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:kap:jeczfn:v:123:y:2018:i:1:d:10.1007_s00712-017-0547-3