Information transmission and inefficient lobbying

- We study a rent-seeking model where lobbies are privately informed about their preferences.
- Two information asymmetry problems arise in the game: the screening and signaling effect.
- The effects interact. Screening enhances signaling while signaling reduces screening.
- Information asymmetry hinders the lobbies' influence and increases the policy maker's bargaining power.
- We find that the society's welfare increases and that the policy maker extracts informational rents.

In a seminal paper, Grossman and Helpman (1994) introduced a framework to understand how lobbying influences the choice of import/export tariffs. In this paper we extend their analysis and assume that lobbies have private information to analyze the effects of information transmission in a Grossman and Helpman lobby game. Information transmission leads to two agency costs. One refers to the cost of signaling and the other to the cost of screening the lobby's competitiveness. The signaling cost reduces distortions resulting from the screening cost. On the other hand, distortions from the screening cost enhance the signaling cost. The two combined effects generate more distortions in the political game than each effect separately. Tariff protection and lobbies' rents are lower than those found in Grossman and Helpman's truthful equilibrium. Therefore, information transmission may improve welfare through the reduction of rent-seeking activities.