David Zetland at Aguanomics had some fun with a lecture and thought exercise.
02 November 2009
The Political Economy of Lobbying
Last week, I taught my students about different auction techniques. After I auctioned four books under different rules, I auctioned $1.00 for $3.75.
Now before you say “WTF?” (or perhaps I am too late!), let me explain.
First, it was an all-pay auction, which requires that all bidders pay their highest bid to the auctioneer, even if they do not “win.”
Third, what happened? There were four bidders. Mr. A bid $0.25; Ms. B bid $0.50; Ms. C bid $0.75; Mr. D bid $1.00. Then Ms. B raised her bid to $1.25 before Mr. D won the auction with a $1.50 bid. Mr. D got $1.00, and I got $3.75 ($2.75 net).
Nice money maker, that all-in-auction :), which is why you should see five, below.
Fourth, why did this happen? Consider this:
1.If you bid $0.25 for $1.00, you stand to make $0.75.
2.If someone raises you (to $0.50), you lose that $0.25.
3.If you bid $0.75, then you still make (net) $0.25.
This set of incentives (“on the margin”) makes it rational to keep raising the stakes given that you have bid because winning always has a higher payoff than losing. The “right strategy” is, of course to not bid at all. (As Joshua, the computer, says in Wargames: “Strange game. The only winning move is not to play.”)
Fifth, all-pay auctions reproduce the dynamics of political lobbying in which the politician is auctioning the wording to some law, and lobbyists from both (many?) sides are contributing money, perks and attention to get their version of the law. All of the lobbyists pay, but only the politician wins.
Oh, and we lose as well. A politician who represented “the People” would write a law that maximized the positive change in social welfare, regardless of lobbying.
Bottom Line: Politicians benefit from lobbying; lobbyists compete to receive our money and rights; and citizens suffer. [I could soften this language to “some politicians” or “sometimes,” but I these are structural institutionalized flaws.]