The Review of Economic Studies Ltd.

Electoral Competition and Special Interest Politics

Author(s): Gene M. Grossman and Elhanan Helpman
Source: The Review of Economic Studies, Vol. 63, No. 2 (Apr., 1996), pp. 265-286
Published by: The Review of Economic Studies Ltd.
Stable URL: http://www.jstor.org/stable/2297852
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Reviewof EconomicStudies(1996) 63, 265-286 0034-6527/96/00120265$02.00
?) 1996The Reviewof EconomicStudiesLimited

Electoral Competition and

Special Interest Politics
GENE M. GROSSMAN
Princeton University
and
ELHANAN HELPMAN
Tel Aviv University and CIAR

First versionreceivedNovember1994;final versionacceptedNovember1995(Eds.)

We studythe competitionbetweentwo politicalpartiesfor seatsin a legislature.The parties

have fixed positionson some issues, but vary their positionson othersin orderto attractvotes
and campaigncontributions.In this context,we examinewhetherspecialinterestgroupsare gov-
ernedby an electoralmotiveor an influencein theircampaigngiving,and how theircontributions
affect the equilibriumplatforms.We show that each party is inducedto behave as if it were
maximizinga weightedsum of the aggregatewelfaresof informedvotersand membersof special
interestgroups.The partythat is expectedto win a majorityof seats catersmore to the special
interests.

1. INTRODUCTION
Specialinterestgroupsappearto wield considerableinfluenceover public policy in many
representativedemocracies.The trade policies of many industrializedcountries favour
vested interestsin the clothing, textile, and heavy industries.Their agriculturalpolicies
give various forms of income supportto farmers.Health and safety measuresshow the
imprimaturof the local insuranceindustryon the one hand,and of powerfullabourunions
on the other. And manufacturershave had much to say about a myriadof environmental
and regulatorypolicies. It seems difficultto argue that the political process serves only
the interestsof the medianvoter.
Interestgroups pursue their quest for political advantageby a numberof different
means. They gather informationthat supportstheir positions and make it availableto
powerfulpoliticians.They take their argumentsto the public in an effort to win voter
sympathy.Sometimesthey undertakedisruptiveactivities,which are intendedto coerce
ratherthan persuade.And, of course,they contributeto politicalpartiesand to individual
candidates'campaigns.
This paperfocuses on interestgroups'use of campaigncontributionsas a vehiclefor
influencingpublic policy. Contributionsmay take the form of cash transfersor gifts in
kind. In any event, we assume that the contributionscan be used by the candidatesto
persuadeand cajole a group of undecidedvoters. Our aim is to characterizethe policies
thatemergewhenrivalgroupsvie for the politicians'favourwhilethe politiciansthemselves
compete for voter support.
The literatureon campaigngiving identifiestwo motives that interestgroups might
have when they contribute to politicians or to political parties. Contributorswith an
electoral motive intend to promotethe electoralprospectsof preferredcandidates.Those
265
266 REVIEW OF ECONOMICSTUDIES

with an influencemotive aim to influencethe politicians'policy pronouncements.Our

model allows interestgroups to entertaineither or both of these reasonsfor giving, but
our analysis of the equilibriumemphasizesthe second. We believe that special interests
do often try to use their campaigngifts to influencepoliticians'positions and we find
support for this view in the empiricalevidence presentedby Kau and Rubin (1982),
Fremdreisand Waterman(1985), Tosini and Tower (1987), and others.
Our setting is one in which two political parties compete for seats in a legislative
body. To attract votes, the parties announce policy platformsand engage in political
advertisingand other costly forms of compaigning.The platformsmay includecommit-
ments on two types of policy issues. The firstare issues about which the partyhas strong
preferencesor predeterminedpositions. The preferencesmay reflectthe party'sideology,
or the positionsmay be inheritedfrom the past if, for example,the partyfeels it must keep
earlierpromisesin orderto preserveits reputation.In any event,we take thiscomponentof
a party's programmeas fixed. We focus instead on the determinationof what we shall
termpliablepolicies.Theseare policiesabout whichthe partieshaveno explicitpreferences
and so are willing to tailor theirpositions to furthertheirelectionprospects.'
Our interestgroupsare collectionsof individualswho sharea commoninterestin the
pliable policies. These organizedgroups can offer contributionsto one or both of the
political parties.Their gifts may be grantedunconditionallyor they may be tied to the
positions adopted by the recipients.Unconditionalgifts are used to satisfy an electoral
motive for giving, while contingentgifts are designedto influencedecisions.We assume
that the groupsare able to communicatethe sense of theirconditionaloffers,even if they
cannot spell out the details in a legallybindingcontract.
If the interestgroupschoose to offercontingentcontributions,they will confrontthe
partieswith a fundamentaltrade-off.By settinga platformthat servesthe generalinterest,
a party can attract votes from the portion of the electoratethat is well-informedabout
the issues. But by choosing policies that cater to the specialinterestsit may be able to
elicit greatercontributionsthat then can be used to influencethe voting of less-informed
or impressionablevoters. We assume that the partiesresolve this trade-offwith the aim
of maximizingtheir representationin the legislature.An equilibriumconsistsof a pair of
platformsand a set of contributionschedules,such that no group or partycan betterits
lot given the anticipatedactions of the others.The equilibriumplatformsand associated
contributionstogetherdeterminethe electionoutcome,whichin turndeterminesthe likeli-
hood that each party'splatformwill be enacted.
The remainderof the paper is organizedas follows. In the next section, we discuss
the relationshipof our paper to severalothers in the literature.Section 3 describesthe
detailsof the model. In Section4, we examinea specialcase in whichthereis only a single,
organizedinterestgroup while Section 5 treats the generalcase with competitionamong
groups. The last section containsa summaryof our findings.

2. RELATED LITERATURE
Thereis, of course,a vast literatureon policy determinationin representativedemocracies.
Our goal in this section is to explain the relationshipof our paper to some others that
have a similarfocus. We make no claims to comprehensivecoverage.
1. Admittedly,the distinctionbetweenthe pliablepoliciesand othersis not alwaysclearcut. In the long-
run,all of a party'spositionsare presumablysubjectto change.But candidatesand partiesare willingto change
theirpositionson some issuesmore freelythan others.The set of pliablepolicy issuesmightincludeallocation
of "pork-barrel"spending,attitudeson gun control and some environmentalquestions,and positions on a
varietyof economicpolicies.
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 267

Our paper has antecedentsin the literatureon probabilisticvoting.2 Enelow and

Hinich(1982), for example,developeda "spatial"modelin whichvoters'utilitiescomprise
two additivelyseparablecomponents.One component relates to the policy issue under
considerationwhile the other reflectsexogenous characteristicsof the candidates.The
politiciansare assumedunable to observeindividualtastes with regardto the exogenous
characteristics.In consequence,they remainuncertainabout how any individualwill vote,
even if they know how he or she will be affectedby the policy in question.3
Lindbeckand Weibull (1987) and Dixit and Londregan(1994) adopted a similar
probabilistic-votingapproachto study policies that redistributeincometo narrowgroups
of voters.They assumedthat the variousgroupsdifferin theirpredispositionto the parties
and identifiedcharacteristicsof a group that make it a good candidateto receivepolitical
largesse.Although these authors focused on the determinantsof the political successof
specialinterests,thereis an importantdifferencebetweentheirworkand ours. Specifically,
they did not allow interestgroupsto competeactivelyfor favourswhereaswe are primarily
interestedin how compaigncontributionscan be used as a tool for such competition.
We treat campaigncontributionshere in much the same way as in Grossmanand
Helpman(1994). Therewe built on Bernheimand Whinston(1986), who describedinflu-
ence-seekingas an exampleof a "menuauction"game. In a menuauction,each of several
principals who will be affectedby an action offers a bid to an agent who will take that
action. These bids take the form of schedulesthat associatea paymentto the agent with
each feasibleoption. Once the agent chooses an action, all of the principalspay the bids
stipulatedby their schedules.Bernheimand Whinstondefinedan equilibriumin a menu
auction as a set of contributionschedulessuch that each one is a best responseto all of
the others, and an action by the agent that maximizesher utility given the schedulesthat
confront her.
Our 1994paperprovidedan applicationof this view of influence-seeking. We focused
on the determinationof importand export taxes and subsidiesin a small,open economy.
We took the governmentto be a common agent for a group of special interestgroups,
each representingthe owners of some industry-specificfactor. The policy makers,who
were alreadyin power, were assumedto set tradepolicy to maximizea weightedsum of
total campaign contributionsand aggregate (or average) welfare. In this model, the
incumbentgovernmentdid not face any explicit competitionfrom rival candidatesnor
did we provideany rigorousjustificationfor its assumedobjective.
Austen-Smith(1987) and Baron(1994) addressedvery similarissues to the ones that
interestus here. Both of these authorsstudiedpolicy determinationin a two-partymodel
of electoralcompetition.And both wereinterestedin the effectsof campaigncontributions
by specialinterestgroups.Austen-Smithassumedthat the partiesuse campaignfunds to
alleviate (risk-averse)voters' uncertaintyabout candidates'policy positions. Baron, like
us, allowedcampaignspendingto have a directeffecton the voting behaviourof a group
of uninformedvoters. A more importantdistinctionbetweentheirpapersand ours con-
cernsthe motivethat groupsare assumedto have for givingto the parties.In both Austen-
Smith and Baron the lobbies take platformsas given and offer gifts to their favourites
with an eye towardaffectingthe probabilitiesof election.45 Here,we do not restrictinterest
2. Weconsiderthis labelto be somethingof a misnomer.In ourmodel,andin manyothersin the literature,
It is only that the politiciansdo not know individuals'preferenceson
every individualvotes deterministically.
some issues,whichcauses them to be uncertainabout how a particularballot will be cast.
3. See also Coughlin(1984, 1986)and Wittman(1983), and Mueller(1989,ch. 11) for a survey.
4. Mageeet al. (1989)makea similarassumptionin the contextof theirmodelsof tradepolicyformation.
5. This is Baron'sassumptionin the last part of his paper,wherehe allowsfor severalcompetinginterest
groups and considersthe determinationof "collective"policies. In the first part of his paper, dealing with
268 REVIEW OF ECONOMICSTUDIES

groups to such an electoralmotive, but also affordthem an opportunityto influencethe

parties'platforms.

3. THE MODEL
We examine a jurisdictionwith two political parties, an exogenous number of special
interestgroups, and a fixed continuumof voters. Our descriptionbeginswith the voters.

3.1. The voters

Like Baron (1994), we distinguishthe behaviourof two classes of voters, the informed
and the uninformed.Informedvoters are those who know and understandthe parties'
positions on both the pliablepolicies and other issues.The welfareof these voters will be
affected by the policies that are ultimatelyenacted and perhapsby other (exogenous)
attributesof the candidatesand the parties.For example,the voters'welfaremay depend
on personalcharacteristicsof the candidates,such as their competenceor charisma,or
votersmay derivesome pleasurefrom supportingthe partyto which they have developed
an historicalattachment.Informedvoters cast their ballots for whicheverparty offers
higher utility, consideringboth their pliable positions and their exogenous programmes
and characteristics.In the model developed here, this is a dominant strategyfor these
voters. The uninformedvoters, by contrast, do not know or are unable to evaluate the
parties'positions on (at least) the pliable issues. These voters may have initial leanings
towardone party or the other, but at least some of them can be swayedby the messages
they receivein the courseof the campaign.Let a denote the fractionof these uninformed
(perhaps"impressionable"is a betterword) voters in the total voting population.
Considerthen a typicalinformedvoter with the label i. This individualderivesutility
ui(PA) from the vectorpA of pliablepoliciesendorsedby partyA, and utility Ui(pB) from
the vectorpB of suchpoliciesendorsedby partyB, with u'( ) continuousand differentiable.
She votes for the candidatesfrom party A if and only if ui(pA) - ui(pB)>,', where ,B'
measuresher assessmentof the superiority(or inferiority,if negative)of party B's fixed
policy positions and other exogenous characteristicsrelative to those of party A. We
assume that the parties cannot observe the ex ante proclivitiesof any particularvoter,
althoughthey presumethese to be drawnfrom a known distributionF(fB). Moreover,we
assumethat the distributionof preferenceson the fixedprogrammesand othercharacter-
istics of the partiesand candidatesis statisticallyindependentof the effectsof the pliable
policies on individuals' utilities. Then both parties will perceive a probability
F[Ui(pA) - Ui(pB)] that individuali will vote for the slate of candidatesfrompartyA. With
a continuum of informed voters, the law of large numbersimplies that the share of
informedballots cast for party A equals ( /n,) fiEI F[Ui(pA) - Ui(pB)]di, whereI denotes
the set of informedvoters and n, the total number(or measure)of such individuals.
An uninformedvoter, too, may have a predispositiontowardone partyor the other.
However,this leaningcan be overcomewith enough campaignrhetoric.In particular,if
party A spends more on its campaign than party B, some of those who were initially
"particularistic"policies,the contributionsare simplyan exogenousfractionof the net benefitscapturedby the
interestgroup.AlthoughBaronrefersto this as a bargainingsolution,he does not specifyany explicitbargaining
processand his "solution"fails to accountfor the surplusto the politicalpartyrelativeto the fallbackoption.
An advantagethat we see of our model comparedto Baron's-beyond the one we stressin the text-is
that it is capableof handlingboth particularisticpolicies (with a singleinterestgroup) and collectivepolicies
(with multipleinterestgroups)withinthe same analyticalframework.
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 269

inclinedtowardparty B will vote insteadfor partyA. We denote by H(- ) the fractionof

the uninformedvoters that votes for partyA, and assumethat it dependson the difference
in the parties'total campaignbudgets.6
We assumethat seats in the parliamentare allocatedby proportionalrepresentation.
Then the fractionof the legislaturecontrolledby partyA matchesthe fractionof the total
votes garneredby this party. Lettings denote this fraction,we have
aJ F[u(PA) ui(pB)]di+ aH(CA CB), ()
n,r iel
where CK is the total campaignspendingundertakenby party K, K=A, B.

3.2. The parties and the government

Each party seeks to maximizeits representationin the legislature(or any monotonically
increasingfunctionthereof). The partiesmay see this as theirobjectivefor any of several
reasons.For example,politicalpartiesoften rewardtheircore memberswithjobs in and
aroundthe government.A party may seek to maximizeits patronageand may recognize
a monotonicrelationshipbetweenthe numberof politicaljobs it controlsand the number
of its seats in the legislature.Alternatively,a partymay wish to implementits ideological
agenda, and may see a positive relationshipbetweenthe prospectsof successfullydoing
so and the size of its legislativecontingent.Of course,with two partiesand proportional
representation,the objective of maximizingseats is equivalent to that of maximizing
(expected)pluralityin the election.This is a commonlyassumedobjectivein the literature
on electoralcompetition.7
With this objective,partiesA and B choose theirplatformsof pliablepoliciesin order
to maximizes and 1- s, respectively.Theydo so recognizingthat theirpolicyendorsements
will affect their popularityamong the informedvoters. At the same time, the platforms
are chosen with an eye towardthe organizedinterestgroups,who may vary theirsupport
accordingto the positions that are taken. The partiesknow that any contributionsthey
collect can be used to financecampaignactivities.
After the electionis over, the legislatureconvenesto set policy. We do not model the
policy-settingprocessin any detail. Rather,we assumethat each partyattemptsto imple-
ment its announcedplatformand that a party'sprobabilityof successincreasesmonoton-
ically with the size of its legislativedelegation.In other words, the legislatureadopts the
vector of pliable policies pA with probabilityq(s), and the vector pB with probability
1-(s), where (-) = - and q'(s) > 0. The function q(s) may, for example, increase sharply
just aboves = 1/2, if havinga slightmajorityof the seatsin the parliamentgreatlyenhances
a party'sprospectsfor successfullyimplementingits programme.

6. It is perhapsmore commonin the literatureto assumethat the ratio of campaignexpendituresaffects

the allocationof votes. See, for example,Baron (1989, 1994), and Snyder(1989). In our view, a specification
in termsof absolutedifferencesis morereasonable,becausea largerbudgetallowsa campaignto reacha wider
segmentof the population.This view could be formalizedin a model of advertisingsimilarto the one in
Grossmanand Shapiro(1984),wherethe fractionof the targetpopulationthat hearsa givenmessageis assumed
to vary with the amountthat is spent on the advertisingcampaign.If each messagethat an uninformedvoter
hearsmakeshim more likely to vote for the party issuingthe announcement,then the numberof uninformed
voterswho cast theirballotsfor partyA will dependon the differencein the sizes of the two budgets.
7. See, for example,Enelowand Hinich(1982),Denzauand Kats (1977)andCoughlinand Nitzan(1981).
The differentcampaignobjectivesthat candidatesmight hold are discussedand comparedin Aranson,Hinich
and Ordeshook(1974).
270 REVIEW OF ECONOMIC STUDIES

While we believe that it is reasonableto suppose that partiesaim to maximizetheir

representationin the legislatureand also that parties in the majoritysometimesfail to
implementtheirprogrammes,the Appendixtreatsa more "pure"case. Therewe examine
policy determinationwhen the legislatureoperatesaccordingto strict majorityrule and
when parties seek to maximizetheir probabilityof winninga majority.To conduct this
alternativeanalysis,we must assumethat the numberof voters is largebut finite and that
membersof specialinterestgroupsconstitutea negligibleshareof the voting population.
With these assumptionsand a furtherone of equalpartypopularity(i.e. the partieswould
each capture50%of the vote if they happenedto adopt identicalpositionson the pliable
policies and to spend identicalamountson theircampaigns),the equilibriumpolicies are
the same as the ones derivedin the main text.8

3.3. The special interests

Special interest groups are collections of voters who share a common interest in the
pliable policies. The membersof an interestgroup may differin their views on the fixed
programmesand other characteristicsof the candidates,and, in the privacyof the polling
booth, they behavejust like any other voters. Nonetheless,these individualsmay have an
incentiveto cooperate with one another, if by doing so they can influencethe parties'
policy platforms.
As Olson (1965) has discussed,the merefact that individualssharea commoninterest
in some policy or policies is not enough to ensure that they will engage in collective
political action. The temptationalwaysexists for each to free ride on the costly political
effortsof the others. But some interestgroupsdo overcomethese free-riderproblemsand
manageto coordinatetheir lobbyingactivities.We take the numberand identitiesof the
organizedspecialinterestsas given (whilerecognizingthat it would be interestingto know
how the policy environmentserves to galvanizecertain interestsand not others), and
examinehow these groupsinfluencethe policy-settingprocess.
Interestgroupsmay have two motivationsfor makingcampaigncontributionsin our
model. First, they may hope to influencethe outcome of the election. An interestgroup
may gain if it can enhancethe prospectsof the partywhosepositionson the pliablepolicies
are more similarto its own. Second,the interestgroupsmay hope to influencethe parties'
platforms;that is, to push the candidatesto supportpoliciesthat betterservethe group's
interests.Some of the membersof an interestgroup may object to spendingon the first
of these objectives,if theirideologicalattitudesdifferfrom those of the partythat is being
supported.But all membersof a group will agree on the desirabilityof pushingthe two
partiestoward the group'scollectivedesideratumon the pliablepolicy issues. Moreover,
as we shall see, the second motive remainsoperativeeven when the individualinterest
groups are relativelysmall, so that each has little ability to affectthe election outcome.
We denote by Wj(p) the aggregateutility that membersof interestgroupj derive
from the vector of pliable policiesp. It is possible that the membersof interestgroupj
care directlyabout only one elementof p, say pj, and that the other elementsof p affect
these individualsonly indirectly(e.g. as taxpayerswho must pay for the benefitsprovided
to other groups),just as they do the generalpublic.Alternatively,the interestgroupmay
have a directinterestin severalcomponentsof p, and severaldifferentinterestgroupmay

8. Lindbeckand Weibull (1987) come to a similarconclusionin their study of electoralcompetition

withoutinterestgroupsor campaignspending.Ouranalysisof thecasein whichpartiesmaximizetheirprobability
of winningis modelledaftertheirs.
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 271

have a stake in the same policy component. If the membersof a group share identical
preferencesconcerningthe issues wherepoliticiansare willing to be flexible,then Wj(p)
is simply the numberof membersof interestgroupj times the utility componentof the
representativeone. In any event, we assume that the members of an interest group
cooperate fully in their collective action, and so seek to maximizetheir expectedjoint
welfarefrom the pliablepoliciesnet of campaigncontributions.LettingCjK representthe
contributionof interestgroupj to party K, we write the objectivefunctionfor this group
as
V1= (0(s)W(pA) + [1- ((s)] Wj(pB)BCfC_BC (2)
If an interestgroup hopes to influencea party'spolicy endorsement,it must make
sure that the partysees a connectionbetweenits platformand the size of the contribution
that will be forthcoming.The group need not announcean explicitquidpro quo; indeed,
the publicmightfrownupon politicianswho openlypeddletheirpoliticalinfluence.Rather,
the interestgroupneeds only convey an understandingthat its contributionwill vary with
the positions that is taken. We would argue that politiciansunderstandthis connection
quite well; in the U.S., proponentsof gun control do not, for example,expect to receive
donationsfrom the National Rifle Association.
We allow the interestgroups considerablefreedom in designingtheir contribution
schedules,cf(pK). We assumeonly that the schedulesare continuous,differentiablewhen
positive, and everywherenon-negative.The latter means that interestgroups can offer
resourcesto the partiesor withhold them, but cannot levy taxes on politicians.A group
can, of course, choose to make its contributionindependentof policy; in this way it can
bolster the chances of its favourite party without causing it to lose any (additional)
informedvotes. A group also might choose to offer its support to only one of the two
politicalparties.

3.4. Political equilibrium

We seek a subgame-perfectNash equilibriumof a two-stage, noncooperative,political
game. In the first stage, the various interestgroups independentlyand simultaneously
announcetheircontributionschedules,one to each of the two parties.In the secondstage,
the parties choose their policy platforms.After the platformsare set, the contributions
are paid and the campaignsare waged. Then the election takes place and finally the
legislaturemeets to implementone of the party'splatforms.We assumethat all expecta-
tions about subsequentevents are accurateand that all promisesare honoured.9
More formally,we propose the following definition:

Definition1. An equilibriumconsists of a pair of feasiblepolicy vectors (pA,, pBo)

and a set of contributionschedules{q40(pA)q j7fO(pB)} one for each lobbyj, such that
(a) pAo maximizess givenpBo { C1O( p)} and {j7f?O(pB)};
Ro .
(b) pBo maximizes 1-s given ~~~~Ao,
{ CAoPA)
, ( )} and CBo (pPB)
(c) each CjK(.) is continuous and differentiable when positive, with CjK(pK) > for
all pK; and
9. In our one-shotgame,the interestgroupshave an incentiveto renegeon theircontributionoffersonce
the platformsare announced.Similarly,the politicianshave no incentiveto pursuetheir announcedpositions
on the pliablepoliciesonce the campaigncontributionshave been paid up. The keepingof promisescould be
motivatedin a repeatedgame,whereagentswould be punishedfor failureto live up to theircommitments.
272 REVIEW OF ECONOMIC STUDIES

(d) for each lobbyj, there do not exist feasiblecontributionschedulesCj(pA) and

CB(pB), such that

({s) Wj(pA) + [-I _(&)] Wj(pB) _ C/A(,A) _ cB(pB)

> p(S) Wj(pAo) + [1 -_ qs)] Wj(p-Bo) _ CAo(pAo) - cBo(pBo)

wherepA maximizesand pB minimizes

1na{ F[ui(PA) Ui(PB)]di+ aH[ + - Z co (p B) -

A
Ck C'o((pA)
_ C(kBA

and
1-a
s= 1 a IA(' F [u'(ji) - ui(P
p)Idi

+ a H[Zk~ fjCAo(pA) + CA (pA)-E Cj o(flB) -CB(fpB)]

Here, conditions (a) and (b) express the Nash equilibriumamong parties in the policy
announcementphase, while condition (d) ensuresthat no lobby can beneficiallydeviate
duringthe initial stage of the game.
Implicitin DefinitionI is the assumptionthat each partycan observethe contribution
schedulesofferedto the other. This assumptioncan be justifiedwith the observationthat
the "schedules"here are intended as metaphors,rather than as literal descriptionsof
explicit contracts. In practice,offers of political support are conveyed as much by the
public posture of a lobby as by any privatecommunicationsit may have with the poli-
ticians. Accordingly,the quidpro quo for campaignsupport may come to be common
knowledgeamong the parties.'0

3.5. Functionalforms
To simplifythe analysis,we adoptparticularfunctionalformsfor the distributionfunction,
F( ), and for the effectiveness-of-campaign-spending function, H( ). We assume that
informedvoters' relativepreferencesfor the immutablecharacteristicsand programmeof
party B are distributeduniformlyin the range

( -b 'b I
2f f '2f '

10. If, instead,we were to allow the contributionschedulesto be communicatedprivatelyto the parties,
then each partywould be forced to conditionits policy choices on its beliefsabout the offersthat had been
made to its rival. As O'Brienand Shaffer(1992) have arguedin a relatedcontext, such a game has many
subgame-perfect beliefsof the parties.Still,
Nash equilibria,as thereis little to disciplinethe out-of-equilibrium
therewouldbe two reasonsto focus on the equilibriathat satisfyour Definition1. First,evenwith unobservable
contributionschedules,theseequilibriaarethe only ones thatcan arisewhenF( ) and H(- ) are linearfunctions,
as we shallassumein the next sub-sectionand thereafter.Moreon this point in a moment.Second,the equilibria
describedby Definition1 are immuneto joint-welfare-increasing bilateralrenegotiationbetweena lobby and a
party, and thus satisfythe conditionsfor a "contractequilibrium"proposedby Cremerand Riordan(1987).
See O'Brienand Shaffer(1992) for a discussionof why such equilibriamight be focal in the set of equilibria
that can arisewhen contractsbetweena principaland a particularagent are unobservableto otheragents.
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 273

wheref > 0 is a parametermeasuringthe diversityof ex ante viewsabout the parties.Then

F[ui(pA) u'(p)]
u

1 ~~A B for -
PB C Ib
--+b+ f[ui(p )-u'(p foru'(pA)
2 -
fI '2fx, f

We also take H( ) to be linear and of the form H(CA - CB) =+b+h(CA - CB), where
h >0 is a parameterreflectingthe productivityof campaignspending.With this specifi-
cation, if the two partieshappento endorsethe same pliablepolicies and if they happen
to spend the same amounts on their campaigns,then party A will capture a fraction
+ b of the votes. The parameterb can be interpretedas the ex ante voter bias in favour
of party A. We might expect b > 0 if party A is the incumbentparty and b < 0 if party B
is the incumbentparty. Such an incumbencyadvantagecould reflectname recognition
and perhapsthe feelingthat "the devilyou know is betterthan the devilyou don't". Also,
b might differfrom zero because one party'scandidatesare seen as more competentor
becauseits ideologicalagendahas greaterpublic appeal.When b = 0, we will say that the
parties are equally popular.
One consequenceof linearity(among others) is that the objectivefunctionfor each
partybecomesadditivelyseparablein the variablesdescribingits own policy platformand
level of campaign spending, and those of its rival. With separability,each party can
make its decisionsabout what contributionoffers to accept and what platformto adopt
independentlyof its knowledgeor beliefs about the incentivesfacing the other. Accord-
ingly, the equilibriathat arisewhen contributionschedulesare observableto both parties
coincidewith those that can arise when the schedulesare communicatedprivately,in the
linearcase.

4. EQUILIBRIUM WITH ONE LOBBY

We begin the analysiswith the case in which there is only a single, organizedlobby. In
this settingwe are able to expose most clearlythe incentivesfacing a lobby and to set the
stage for the more complicatedsituation that arises when several groups compete for
favours.The single-lobbycase also may be of independentinterest,inasmuchas it sheds
light on the determinationof what Baron (1994) refersto as particularistic policies.These
are policieswhose benefitscan be deniedto those who do not contributeto the lobbying
effortand whosecosts are spreadso thinlyin the populationthat they do not inspiregroups
to organizein opposition.Baroncites as examplesthe specialprovisionsin legislationthat
favourparticularfirmsor industriesand the interventionsthat legislatorssometimesmake
with the bureaucracyon behalf of their supporters.
When only a single interest group curries politicians'favours, its problem can be
treatedas one of direct control. That is, we can view the lobby as if it could implement
any pair of (pliable) policy platformsit desires,providedthat its contributionoffersare
sufficientlylarge as to be acceptableto the parties.Each party always has the option of
decliningthe lobby's offer, in which case it would choose the platformthat attractedthe
greatestnumberof informedvoters.To preventthis fromhappening,the lobby'scontribu-
tion must be among those that satisfy a participationconstraint.
How largemust the contributionto partyA be in orderto induceit to endorsesome
policy PA? Recall the relationshipbetween the parties'platformsand campaignbudgets
and the electionoutcome,in the light of our linearityassumptionsfor F( ) and H(.). We
have s=b ++ (1 - a)f[ W(pA) - W(pB)] + ah(CjA-Cj B), where W(p)- (/n,) fic- u'(p)di
274 REVIEW OF ECONOMIC STUDIES

is the averagewelfareof informedvoters when the vector of pliable policies is p. If the

party were to refuseto be swayedby the lobby's offer, it would supportthe policies that
best servedthe averageinformedvoter.This policyvector,whichwe denotebyp*, satisfies
V W(p*) = 0.11 So the lobby must guarantee the party at least as many seats as it would
capture by endorsingp*. Evidently,it must offer to party A a contributionof at least
[(1 - a)f/ah][ W(p*)- W(pA)]. Notice that the size of the minimumpayment does not
dependon the policy position anticipatedfrom party B.
Similarly, the lobby must offer party B a contribution of at least
[(1 - a)f/ah][ W(p*)- W(pB)] in orderto induceit to adopt the platformpB. The lobby's
problem,then, is to choosepA andpB to maximize(2), subjectto the constraintsthat

CK>(l-a)f[W(P*) W(pK)] for K=A, B. (3)

ah
The constraintsstipulatethe minimumsizes of the campaigncontributionsas functions
of the platformsthat the group chooses to induce.

4.1. Contributionswith only an influence motive

Let us suppose, for the moment, that the lobby decides to give the two partiesexactly
what is needed to induce them to support the platformspA and pB, but nothing more.
Withtheseinfluence-motivated contributions,partyA capturesa fraction2 + b of the seats,
whiileparty B capturesthe remainingfraction Ab,no matte whatthepolicy vectors
andpB happento be. The lobby'sproblembecomesone of choosing the two platformsto
maximizeits expectedutility, given qA = qp(b+-) and TB= I - q(b + 2), and contributions
that satisfy (3) with equality. We have, then, the following proposition that describes
equilibriumpolicies when the lobby eschewsthe electoralmotive for politicalgiving:

Proposition 1. If the contributionsfrom a sole lobby satisfy both participation con-

straints in (3) with equality, the equilibriumpolicy platforms satisfy

p = arg maxp[ Wj(P) + ah W(p)1 for K=A, B, (4)

where (PA = p(b + 2) and TB= I- (b +

Evidently, the influence-seekinglobby induces both parties to behave as if they were

maximizingweightedsums of the collectivewelfareof interestgroup membersand the
averagewelfareof informedvoters.
It may help to think about some specificexamplesin order to understandexactly
what this formulameans.Consider,for instance,the classicalproblemof an industrythat
generatesa negativeexternality.If the externalityis linkedto the scaleof production,then
a per-unitoutput tax equal to the marginaldamagebest servesthe interestsof the average
voter. But suppose that the industry'slobby links its campaigncontributionsto the size
of the industrytax or subsidy.Then the equilibriumplatformswill be ones that maximize
weightedsumsof averagewelfare(i.e. consumersurplusplus profitsplus tax revenue)and
industryprofits. These platformsmay involve a tax or a subsidy, and will certainlybe
sampleof the total populationof voters,in the sensethat
11. If the informedvotersare a representative
the distributionof utility functionsamong informedand uninformedvoters is the same, then the policyp* is
the one that maximizesa Benthamitesocial welfarefunction.
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 275

moregenerousto the industrythanthe "optimal"Pigouviantax.'2Orconsideran economy

that producesa single output from fixed suppliesof capitaland labourand whereutility
is linearin consumption.The welfareof the averagevoter is maximizedby a flexiblewage
policy that ensuresfull employmentof the L workers.But if a union representingthe
workersoffersdonationsto the partiesthat are contingenton theirendorsinga minimum
wage policy, then the equilibriumplatformswill contain such proposals as long as the
elasticityof labourdemandis not too high.'3
Another illustrationof (4) draws on the political-scienceliterature.Consider the
familiarspatialvoting model, wherea scalarpolicy variablep is to be chosenfrom among
points on the real line. Suppose that voter i has bliss point pi and utility from policy p
given by Ui= -(p -pi)2. Let voters'bliss points be uniformlydistributedon [0, 1] and let
informedvoterscomprisea representativesampleof the whole.The distributionof voters'
ex antepreferencesis, as before,independentof the distributionof benefitsfromthe pliable
policy. Finally, let therebe a single,organizedinterestgroup, representingall voters with
blisspointsin the range[mn,n]. ThenPropositionI impliesthat,whenthe lobbycontributes
only to influencepolicy choices, the equilibriumplatformssatisfy
PK=! [ +oK(n m)(n+m) for K= A, B,
2L +q(n - m) J
where 6 _(1 - a)f/ah. Notice that PK 1/2 (the bliss point of the median and average
voter) as -)Xoo),whilePK (n + m)/2 (the bliss point of the medianand averageinterest-
groupmember)as -+O.Also, pK> 1/2 when (n+ m)/2 > 1/2 andpK< 1/2 when (n + m)/
2< 1/2; i.e. the platformsalwayslie betweenthe bliss point of the medianinterest-group
memberand that of the medianvoter. Finally,the largeris pK, the fartheris pK from 1/2
and the closer it is to (n + mn)/2.
Returningto the moregeneralinterpretationof the model,we nextestablisha proposi-
tion that compares the campaign platforms of the two parties and the contributions
receivedby each one, again for situationsin which the lobby pursuesonly an influence
motive for giving. Suppose,for concreteness,that party A is the more popularparty; i.e.
b > 0. Then we have:

Proposition 2. If b > 0 and the contributionsfrom a sole lobby satisfy the par ticipation
constraintsin (3) with equality, then Wj(pA)> Jy(pB) W(pA) < W(pB), and CA> CB.

The propositionfollows straightforwardly from (3) and (4).14 Notice first that b>O
implies (p(b+ 2) > 1 - (p(b+ -). Therefore,it is the more popularparty that appliesgreater
12. Let d be the marginaldamagecausedby a unit of the industry'soutputand let tK be the per-unittax
advocated by party K. Then in political equilibrium, tK=d- [(TKah)/(I - a)f J(x/x'), where x is industry output
and x' is the slope of the industrysupplycurve.
13. Let F(K, L) be the aggregateproductionfunction.The minimumwage wK supportedby party K
maximizesqKwL + ((1 - a)f )/ahF(K, L), subjectto the constraintsthat L ? L and FL(K,L) = w. The solution
has a minimumwage above the market-clearing wage providedthat
ah (P
E<
ah,K+ (1 - a)f'
wheres -FL/LFLL is the elasticityof labourdemand.
14. P10oof: From (4) we have Kj (pK) + a W(pK) > KW. (pL) + a W(pL) for L # K; K, L = A, B and
3 =(1 - a)f/ah. These inequalities imply: (i) (A - B) v(PA) > (A - B) W,(p) and (ii)
S[W(p) )- W(pL)]I>vK[ WJ() )- Wj(p ). For A> T, condition (i) implies Wj(pA) > W,(pB), which combined
with (ii) for K= B, implies W(pB)> W(pA). Finally, when (3) holds as an equality for K=A and K=B,
W(p) > W(pA) implies CA> CR.
276 REVIEW OF ECONOMICSTUDIES

weight to the welfareof the special interestgroup in setting its flexiblepolicy positions.
In other words, the lobby inducesthe party whose candidatesand fixed programmehave
greaterpublic appealto choose a platformof pliablepoliciesthat is closer to the lobby's
ideal.'5 But then this party's platform must be further from the ideal of the average
(informed)vector. The latter fact, togetherwith (3), implies that the lobby contributes
more to the party with the better election prospects.The last observationis in keeping
with Snyder's(1990) view of political contributionsas investmentsin contingentclaims
(the claims pay off only if the recipientsend up in a position to influencepolicy), a view
which he supportswith evidenceon campaigngifts to candidatesfor the U.S. House of
Representatives.
The following propositionindicateshow the platformsthat arise in an equilibrium
with influence-motivated contributionsrespondto the parametersdescribingthe political
environment.16

Proposition 3. If the contributionsfrom a sole lobby satisfy the participation constraints

in (3) with equality, then Wj(PK) is smaller and W(pK) is larger the larger is _ (1 - a)f/
ah.

Both partiescater more to the specialinterestgroup the greateris the susceptibility

of uninformedvoters to campaignspendingand the largeris the fractionof these indi-
vidualsin the total voter population(i.e. the largerare h and a, respectively),becausethe
lobby gives largergifts to each party the more productiveare its funds in buying votes.
On the other hand, the platformsmore fully reflectthe interestsof the averageinformed
voter the smalleris the diversityof preferencesover the ideologicalissue. When the range
of the /B'sis small (i.e. f is large), there are more voters at the margin of indifference
between the two parties, and so an endorsementof a platform that neglects the public
interestis more costly to the parties.7
As a final observation,we note the similaritybetweenthe form of the equilibrium
platformsdescribedby (4) and the equilibriumpolicies that emergedfrom the model in
Grossmanand Helpman (1994). There (in the context of tariff formation)we assumed
that a singleincumbentpolicy makerhas as her objectivethe maximizationof a weighted
sum of campaigncontributionsand averagevoterwelfare.We showedthat the equilibrium
policies satisfy an equationwith the same form as (4). We now find that-at least when
thereis one organizedlobby whichpursuesonly an influencemotivefor campaigngiving-

15. This result is at odds with one derivedby Baron (1994). Baron establishesthat, in his model, a
candidatewith an incumbencyadvantage"canaffordto be more independentof interestgroups",whereasthe
challengerwith worseelectionprospectscatersmore to specialinterests.Whendiscussingparticularistic policy
positions, Baron assumesthat the interestgroupscontributea fixed portion of the benefitsthey derivefrom
politicians'favours.He modelsincumbencyadvantagealternativelyas a biasin the votingpatternof uninformed
voters (only) and as the abilityof a candidateto delivergreaterbenefitsto interestgroupsfor a given burden
to the electorate.When it is the former,the incumbentanywaycapturesmore of the votes of the uninformed
for a givenamountof campaignspendingand so devotesmoreefforton the marginto attractingthe informed
voters. Whenit is the latter,the incumbentanywayattractsgreatercampaigncontributionsfor a given policy
stance,and so againattemptsto appealmoreto the informedvoterson the margin.In our model,the popularity
advantageappliesequallyto the behaviourof informedand uninformedvoters, neithercandidatecan reward
the interestgroup without at the same time harmingthe generalpublic,and the interestgroup chooses how
muchto contributeto the parties.In suchcircumstances,an interestgroupwill wish to investmorein the party
that is more likelyto be in a positionto set policy and so will exerta greaterinfluenceon its platform.
16. The proof of this propositionis similarto the proof of Proposition2.
17. Dixit and Londregan(1994) find similarlythat transferpoliciestend to favourgroupsof votersthat
have "central"views on ideologicalissues and thus many memberson the marginof indifferencebetweenthe
two candidates.
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 277

the government-as-agentframeworkrepresentsa proper reducedform of a model with

electoralcompetition.

4.2. When is an electoral motive operative?

We have so far assumed that the interestgroup would wish to make the participation
constraintsbind for both political parties. In other words, the group offers each party
only what it takes to win its supportfor the desiredplatform.Let us examinenow when
this will be the case.
The first-orderconditions for the maximizationof Vj with respectto CJ4 and jB,
subjectto the participationconstraints(3), imply
(p(s)ah[ W (p) J( pB)] = 1- A;(5)

pV(s)ah[Wj(pB)- W(PA)]=1 =_ B (6)

whereAK is the Lagrangemultiplieron the participationconstraintapplicableto partyK.
It is clearthat AK must be positivefor at least one K (i.e. the participationconstraintmust
bind for at least one party),becausethe left-handsidesof (5) and (6) have oppositesigns.
In otherwords, it neverpays for the lobby to give more than is necessaryto both parties.
Moreover,if the lobby does give more than is requiredto one of the parties,it must be
the one that endorsesits more-preferredplatform;for example,(5) can be satisfiedwith
XA = 0 only if Wj(pA)> W/(pB). The party with a non-binding participation constraint
reeeivesmore contributionsin total than its rival (i.e. CA > CB in the case just described)
and adopts a platformof pliablepoliciesthat is less mindfulof the welfareof the average
voter.18
Indeed, only the party that is ex ante more popular is a candidateto receiveextra
campaignsupport.To see this, supposethat the otherwas receivingthe largercontribution.
Then the lobby could switch the labels on its offers (i.e. offeringto party A what it had
intendedto offer to B, and vice versa) and at the same time reduceits (new) offer to the
more popularparty,in such a way as to preservethe originalprobabilitydistributionover
policy outcomes. This would reduce its total contributionbill, which clearly would be
profitablefor the lobby. We have thus established:

Proposition 4. Let party A be the morepopular party (i.e. b > O). Then (a) the partici-
pation constraint (3) is satisfied with equality for party B; and (b) if the participation
constraint (3) is satisfied as a strict inequality for party A, then Wj(pA)> j(pB)
W(pA)< W(pB) and CA > CB.

Notice that Propositions(2) and (4) imply that the more popularparty amassesgreater
campaignfunding and adopts a platformmore favourableto the special interestgroup
and less considerateof the averagevoterirrespectiveof whetherthe interestgroupchooses
to satisfy the participationconstraintwith equalityor not.
If the lobby does give to the more popularparty in excess of what is neededto gain
its acquiescence,the motivationwould be to help that party captureadditionalseats in
then its platformsatisfies(4), but with
18. If (3) holds as an equalityfor party B, for examp?le, pB=
(A
-b +-(I-a )ahC +(t-a)fW(p*). Then W,(p )+3W(p )>pBW,(pA)+3W(pA), where
6 _af/(1 - a)h. This, togetherwith W,(pA)> Wj(pB), implies W(pA)< W(pB). Moreover,if (3) holds as an
equality for party B and as an inequality for party A, we have CA> CB+ 6[ W(pB) - W(pA)J, which together
with W(pA) < W(pB) implies CA> CB.
278 REVIEW OF ECONOMIC STUDIES

the legislature.By doing so, the lobby could increasethe probabilitythat its preferred
platformwould be implemented.Suppose that party A is the more popular party, and
supposethat the lobby contemplatesgivingthis partya bit more than is neededto induce
the party to choose the policypA. The expectedmarginalbenefitfrom the first dollar of
"extra" contribution is qp(s)ah[ W(pA)- ty(pB)], which reflects the group's preference
for A's platform and its marginaleffect on the probabilitythat this platform will be
implemented.The marginalcost of the extracontributionis of courseequal to one. Thus,
we have

Proposition 5. If b>O and qp'(s)ah[Wj(pA) - (pB)> 1, where pK satisfies (4) for

K= A, B, then the participation constraint in (3) will hold as a strict inequalityfor party A.

Evidently,the lobby finds an electoralmotive to contributeto partyA (beyond the influ-

ence motive that always exists) only if the lobby would fare very differentlyunder the
alternativeplatforms,if campaignspendingis relativelyproductivein buyingvotes (a and
h are large), and if increasedrepresentationin the legislaturegreatlyenhancesa party's
prospects for implementingits programme(q(s) is large). The size of the difference
W (pA) -i (pB) reflectstwo considerations.First, it reflectsthe extent of the informed
voters' predispositionto party A. The smallerthe bias b, the closer togetherwill be the
two policy vectors in (4), and the less likely it will be that the lobby perceivesa benefit
from helpingpartyA to win more seats. Second,it reflectsthe absolutesize of the lobby's
stake in the policy issues.

5. EQUILIBRIUM WITH SEVERAL LOBBIES

Now we seek a subgame-perfectNash equilibriumwhen severalinterestgroups vie for
influenceover the parties'platforms.Again we are free to treatthe lobbiesas if they were
facingproblemsof directcontrol, but this time we must incorporateinto theirconstraints
the anticipatedactions of the rival organizations.Considerfor examplethe problemcon-
frontingthe interestgroup 1. This group behavesas if it were designingthe platformsp1
and pB, but it takes as given the contributionschedulesofferedby the other lobbies. It
makes the choice to maximizeits own welfare,subjectto the constraintthat the offers
must be large enough to induce the parties to comply. Of course, in equilibrium,all of
the lobbies' "choices"must be mutuallyconsistent;i.e. they all must designatethe same
platforms,which are the ones that the two partiesannounce.
More formally, let CK, (pK) Ej? K(PK ) be the aggregate contribution schedule
offeredto party K by all lobbies other than 1.Then lobby / choosespA, pB, CA,and CBto
maximizeits expectedwelfarein (2), subjectto the constraintsthat

C> maxL ahf W(P) +C_(p) I-L fW(prI)+CfI(pK)1 forK=A, B. (7)

The (participation)constraintsensure that each party prefersto endorse its prescribed

platform than to decline the offer from lobby 1 and choose an alternativeplatform.
For future reference, we denote by pK, the policy vector that maximizes
(1 - a)f W(p)+ ahC?,(p). This is the best that party K could do if it were to ignore the
offer from lobby 1.
Let us provisionallyassume that lobby / opts to make its participationconstraints
bind with equality.When lobby 1pays these minimallyacceptablecontributions,it antici-
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 279

pates that party A will capturea fraction

2 + b + (1 - a)f[ W(p_-,)- W(p_)] + ah[CA,(p?,)- )
of the seats. Notice that this fractionis a constant (say s,) from the lobby'spoint of view.
It follows that the platformsthat maximizethe group'sexpectedwelfaresatisfy the first-
orderconditions

+V , (pr
(&)VW =(0 ) fW(pA) + VCi4 (pA) (8)
ah
and

[I_ P(j)V B a_ _
[1~~~~
f(/). p/) w(p/B) + VC! (p1B)
= O (9
ah
Now look at the problemfrom the politicians'perspective.When confrontedwith
the full set of contributionschedules,the politicalpartiesset theirplatformsto maximize
their sharesof the vote. The first-orderconditionsfor these maximizationsimply
(1-a)fW(pK) + ahVCK(pA)=0 for K=A, B, (10)
where CK(pK) i- c/((pK) is the aggregate contribution schedule confronting party K.
In words,the partiesbalancethe marginalloss of informedvotes causedby theirdeviating
fromp* againstthe additionaluninformedvotes they captureby spendingthe extradona-
tions from the interestgroups.
In the equilibrium,the platformsanticipatedby each lobbymust be the same as those
actually announcedby the parties; i.e. p =pK for all / and for K=A, B. Therefore,we
can combine (8), (9), and (10) to derive
q({ )V WI(PA) = VCIA(pA); (11)

[1 _q(s)]V W (pB)=VC/B(pB). (12)

These equationsrevealan importantpropertyof the equilibriumcontributionschedules;
namely,theseschedulesmustbe "locallytruthful"in the neighbourhoodof the equilibrium
platforms.In other words, when a lobby treatsthe make-upof the legislatureas a given,
it designsits bids so that the shapeof each scheduleaccuratelyreflectsthe expectedbenefit
it would derive from a small change in the party's platformaround the equilibrium.'9
Lemma 1 states this requirementmore precisely.

Lemma 1. If all lobbies set contributionschedules that are everywhere continuous and
differentiable wherepositive, and if all lobbies satisfy the participation constraints (7) with
equality, then the contribution schedules C/ ( ) for lobby 1 must be locally truthful (i.e.
satisfy (1 1) and (12)) when evaluated at the equilibriumpolicies pA and pB.

In a subgame-perfectequilibrium,all lobbies must anticipatethe same election out-

come. So ,= s? for all 1.Using this fact, (11) and (12) can be combinedwith (10), to yield
conditionsthat the equilibriumplatformsmust satisfywhen all lobbies opt to have both

19. See Grossmanand Helpman(1994) for furtherdiscussionof local truthfulnessand its relationto
"globaltruthfulness",as definedby Bernheimand Whinston(1986).
280 REVIEW OF ECONOMIC STUDIES

participationconstraintsbind. These are

(p(s?)>E VWj (pAo) + ( ) V W( Ao) = 0; (13)

[ 1-q(s)]Z EVWi(p a+(I )fVW(pBo)=0. (14)

These conditionsimply:

Proposition 6. Whenall lobbies satisfy the participation constraints (7) with equality,
each party's equilibriumplatform satisfies the necessary conditionsfor maximizing a weighted
sum of the aggregate welfare of all interest group members and the average welfare of
informed voters.

Conditions(13) and (14) providea partialanswerto the followingquestion:Which

interestgroupsare most successfulin influencinggovernmentpolicy?The answer,we find,
is that all organizedinterestgroupsare equallysuccessful,in the sense that theirmembers
receiveequal weight in the parties'political calculus.The net effect of privatecampaign
financingis to push policy in a directionthat is favourableto the averagememberof an
interestgroup and away from the policy that would best servethe interestsof the average
(informed)voter. Of course, the final platformchoices will not be equally close to the
bliss points of all of the lobbies; this dependson how similara lobby'spreferencesare to
those of the average voter and how the other interestgroups line up on the issues of
concernto it.
The conditionsthat characterizethe equilibriumplatformshave anotherinteresting
implication.The politicalsystemworksbest, of course,whenall votersare informedabout
the issues (a = 0). Then the interestgroups are ineffectualand both parties choose the
platformthat maximizesaggregatewelfare.But the same outcome is achievedin a very
differentset of circumstances.Supposethat everyvoter is a memberof exactlyone interest
group and that the informedvoters constitutea representativesampleof the electorate.
Then, no matterhow large the fractionof uninformedvoters nor how susceptiblethese
voters may be to campaignrhetoric,the equilibriumpolicies again will be the ones that
best serve the voters' (collective)interests.
Notice that (13) and (14) do not uniquelydeterminethe equilibriumplatforms,even
when W( ) and 4jV(.) are concavefunctions.BesidesPA andpB, the (expected)composi-
tion of the legislature(s?) appearsin theseexpressions.The equilibriumseatcountdepends,
in turn, on the total amountsof contributionscollectedby the parties.It is true, as in the
case of a single lobby, that an individualinterestgroup prefersto concentrateits giving
on the party that it expectswill be in a betterposition to implementits platform.And it
is also true that the party expected to capturea legislativemajoritycaters more to the
special interests.But there is a potential here for self-fulfillingprophesiesthat does not
exist when a singlelobby plays the contributiongame. The self-fulfillingprophesiesreflect
a type of coordinationfailureamong the lobbies.20
Suppose, for example, that party A happens to be the more popularparty (b>0),
but that each lobby expects that party B will capture the majorityof the seats. These
20. Morton and Myerson(1992) find a similarresultin a one-dimensionalspatial-votingmodel, where
partiessell "services"to specialinterestgroupsand use the proceedsto fund advertisingthat directlyenhances
the welfareof voters.
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 281

expectationsare based on the belief that the other lobbies will give more generouslyto
party B than to partyA. Then each lobby will be welljustifiedin concentratingits efforts
on influencingB's platformand, in the end, theirexpectationsmay be validated.Whereas
an only lobby can alwaysgain by ensuringthat the more popularpartywins the majority
of the seats, a lobby that is one among many cannot necessarilydo so. To reversethe
fortunes of the two parties in a way that conserves resources,it may need the tacit
cooperationof other lobbies.
The potential for multiplicityof equilibriacan also be understoodin anotherway.
Recall that s= 2+ b + (I - a)f[ W(p,) -W(p%,)] + ah[C_4 (pig,)-Ci,(p%)] when lobby /
makes the minimalcontributionsneededto induce the platformsPAo andpBo. Of course,
if all lobbies give minimally,then this condition must hold for each one. The policies
A P
p,1
andp% are the ones that the partieswould choose if they ignoredthe offerfrom lobby
1. Notice that these policies depend on the shapes of the lobbies' contributionschedules
awayfrom the equilibrium. And whilethe equilibriumrequirementsplace some restrictions
on the global shapes of these schedules(for example,

(1 - a)f[ W(p_,)- W(p_)] + ah[C_ (p_) -

must be the same for all 1) the requirementsare not enough to pin down the equilibrium
uniquely.
Still, some of the Nash equilibriamay be more compellingthan others.For example,
if b = 0, the symmetricequilibrium-in which the lobbies treat the parties similarlyand
the election yields an evenly split legislature-may be focal. If b >0, the lobbies would
have no particularreason to expect the bulk of the contributionsto go to party B, and
in some cases they will have good reasons to expect the opposite. One such case arises
when all lobbies are offeringpositivecontributionsto both parties,not only in the neigh-
bourhood of the equilibrium,but also around the variouspoints that the partieswould
choose if one of the lobby groups were to be ignored.In this situation, the equilibrium
with s <- is Pareto dominatedfor the entireset of interestgroups by anotherwith s >
The alternativeequilibriumcan be constructedas follows. Let each lobby offer to party
B in the new equilibriumexactlywhat it offeredto partyA in the old. Let each construct
its new offer to party A by subtractinga fixed amountfrom the (positive) offersto party
B in the old equilibrium,plus an additionalamountthat increaseswith the distancefrom
the initialpBo. Finally,let the fixed reductionsbe chosen so that partyA capturesas many
seats in the new equilibriumas party B did in the old, and let the additionalreductions
be chosen so that no partywill declinethe offerfrom some lobby in settingits platform.2'
The newlyconstructedcontributionschedulesare best responsesto one another,and they
induce each party to chose the platformin the new equilibriumthat the other chose in
the old. Finally, since each party wins as many seats in the new equilibriumas the other
did in the old, the new equilibriumhas exactly the same distributionof policy outcomes
as the old. It follows that all interestgroupsgain.

21. That is, let C,K(p) be the initialscheduleofferedby lobbyj to partyK and let C/K(p)be the alternative.
We propose Co`(p)= CA(p) for all] and CjA(p)= CjB(p) - z, (p-p), whereeach Z,() is a functionthat is
everywherenon-negativeand that reachesa uniquemaximumat 0. Let the constantszj be chosenso that z.>O
and j, zj= 2b/a h, and the functionsZj() so that
, ((I- a)f W(p) + ah E
(I - a)f W(Mp)+ j C8( p) > maxp [C(p)
Zi(p-p?]
- - aiz,}

for all 1.This will be possible,providedthat the Cj (p%)in the initialequilibriumare largeenough.In the event,
party A chooses the platformpA =pB, party B chooses pJ=pA, and lobby I gains z1 relativeto the initial
equilibrium.
282 REVIEW OF ECONOMIC STUDIES

More generally,anytimeb >0 and s <, the lobbies are paying excessivelyto allow
the less popular party to capture a majorityof the seats. It is never in their collective
interest to do so. But it may not always be possible to devise alternativecontribution
schedulesthat allow each to pay a smallercontributionwhile preservingthe probability
distributionover policy outcomes.If it is not possibleto do so, thena Paretoimprovement
may not be availablewithin the set of Nash equilibria.In such cases the realizationof
joint gains may requirethe enforcementof an explicitlycooperativearrangement,where
some lobbies agree to some political actions that are not best responsesto the others
and where certain of the interest groups receive transfersas side paymentsunder the
agreement.22
Let us now examinewhethersome interestgroupswould opt to give to theirfavourite
partiesbeyondwhat is neededto influencetheirplatforms.We firstestablishthe following
proposition,indicatingthat at most one lobby groupcan perceivean electoralmotive for
contributingto a given party.

Proposition 7. For each political party K= A, B, there is at most one lobby (gener-
ically) that satisfies the participation constraint (7) as a strict inequality.

Supposeto the contrarythat lobbies I and 2 each gave extra contributionsto party A in
order to bolster its election returns.Then, in equilibrium,the marginalbenefitperceived
by lobby j for contributing to this party would be (p'(s)ah[WJ(pA) - 4j(pB)]g forj= 1, 2,
while of course the marginalcost for each would be 1. Both lobbies could satisfy their
first-orderconditions for optimal giving only if WI (PA) - WI (pB) happened to equal
W2 (NA) - W2 (pB); that is, if the two lobbiesheld exactlythe same absolutepreferencefor
partyA's pliablepoliciesover those of party B. Electoralsupportbeyondwhat is justified
by the influencemotive constitutesa publicgood for all interestgroupspreferringa given
party's platform.As in many other contexts, it is only the player that has the most to
gain that might contributevoluntarilytoward the purchaseof a public good.
The electoralmotive might be operativefor a lobby if it stands to gain greatly by
havingone party'splatformimplementedratherthan the other's.But if all interestgroups
are "small",in a sense made precisein the next proposition,then none will see a marginal
benefitof "excess"contributionsequal to their marginalcost. In this case, all campaign
giving is governedby an influencemotive alone.

Proposition 8. Consider a constrained equilibrium, in which each lobby must satisfy

(7) as an equality for each party. Let (PA, pB, s) be the platforms and seat count in this
constrainedequilibrium.Then if q(s)ah
Wj(pA)a-
Ij(pB)I < I for allj, the constrainedequi-
libriumis also an unconstrainedequilibriumin whichnone of the lobbies exercises an electoral
motive for campaign giving.

The propositionis straightforward.Startingfrom an equilibriumwhereall participa-

tion constraints bind, lobby j perceives a marginal benefit of q0'(s)ah[W(pA)- Wy(pB)]

from giving a little bit more to party A, and (p'(s)ah[ Wj(pB) - 4/(pA)] from giving a little
more to party B. If the inequalityin the propositionis satisfied,it will not wish to give
the extraamountto eitherparty,in view of the marginalcost of the additionalcontribution
22. We suspectthat any equilibriumthat has the less popularcandidatewinninga majorityof the seats
will not be a coalition-proofequilibrium(see Bernheimet al. (1987)). But we have not been able to provethis
for all types of equilibria.
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 283

of 1. The interpretationof this in termsof the sizes of the groups is as follows. Suppose
we start with a given set of interestgroupmembersand then dividethese individualsinto
a larger and larger numberof (smaller)lobbies, using any allocation of individualsto
groups at all. When the numberof differentgroups is largeenough, Wj(p) will be small
for everyj, and so will the difference IWj(p) - Wy(pB)j. In the event, the electoral motive
for campaigngiving vanishes, but the influencemotive remains.Indeed, (13) and (14)
continue to characterizethe equilibriumplatformsno matter how finely the groups are
divided,so long as the participationconstraintsbind for each one.

6. SUMMARY
Interestgroups make campaigncontributionseither to influenceelectionoutcomesor to
influencepolicies.We have developeda model of campaignfinancein whichspecialinter-
ests may have eitheror both of thesemotivesfor giving.In the model, the specialinterests
tailor schedulesthat link campaigngifts to policy endorsements.The schedulesare pro-
posed to two political parties,who are vying for seats in a legislature.The partieshave
fixed stanceson some issues but have yet to announcetheir positions on other "pliable"
policies, about which they have no inherentpreferences.Confrontedwith offersfrom the
variousinterests,the partiesannouncetheircampaignplatforms.They tradeoff the extra
campaigncontributionsthat may be forthcomingif they cater to the groups' demands
against the votes that this may cost them among the well-informedsegment of the
electorate.
The paperanalysesthe equilibriumof a two-stagegame.In the firststage, the interest
groupsstrategicallydesigntheircontributionschedulesto maximizetheirexpectedwelfare
net of political pay-outs. In the second stage, the partieschoose platformsto maximize
their representationin the legislature.In the voting booth, an informedvoter casts her
ballot for the partywhosecandidatesand platformshe prefers.In contrast,an uninformed
(or, perhaps,impressionable)voter may respondto campaignrhetoric.The differencein
policies and spendinglevels determinesthe election outcome, which in turn decides the
probabilitythat each party'splatformwill be implemented.
Our model predictsdivergencein policy platforms.The party that is expectedto win
the majorityof the seats garnersgreaterattentionfrom the specialinterests.As a result,
it is inducedto adopt a platformthat gives more weightto theirconcerns.The underdog
party also caters somewhatto the special interests,but its equilibriumplatformis closer
to the bliss point of the averageinformedvoter. This findingmay have relevancefor the
debate over term limits. With the advantagethat incumbencybrings in terms of name
recognitionand reputation,incumbentsare overwhelmingfavouritesin many elections.
Our analysis suggeststhat these candidatesmay convert their popularityinto campaign
war chests,with detrimentaleffectson the welfareof the averagevoter. Termlimitswould
periodicallyrestorea more even election,and thus might diminishthe influenceof special
interestgroups.
When interestgroups offer the parties contributionsthat are platform contingent,
they induce in them a preferenceorderingover the pliable policies. In our model, these
preferencestake a particularlysimpleform. Each party is inducedto behaveas if it were
maximizinga weightedsum of the welfarelevelsof two groupsin the polity.The aggregate
interestof informedvotersreceivesa weight that increaseswith the share of such voters
in the voting population and decreaseswith the diversityof their opinions about the
relativedesirabilityof the parties'ideologicalpositions.The aggregateinterestof members
of organizedinterestgroups receives a weight that increaseswith the susceptibilityof
284 REVIEW OF ECONOMICSTUDIES

uninformedvotersto campaignspending.The weightimplicitlygivento the interestgroup

membersalso varieswith the numberof seats a party is expectedto win, which accounts
for the above-mentioneddifferencein the parties'platforms.It is interestingto note that
many political-economymodels ascribe weightedsocial welfare functions to politicians
making policy choices. Our model provides some underpinningsfor this common
specification.
If interestgroupscan communicateplatform-contingent contributionoffers,they will
alwaysperceivean influencemotive for givingto each partywhose platformmighteventu-
ally becomepolicy. But the groupsmay or may not perceivean incentiveto give to their
favouriteparty beyond what is needed to exert the desireddegreeof influence.We have
shown that the electoralmotive for giving-which featuresprominentlyin many previous
models of campaigncontributions-can operatefor at most one interestgroup favouring
each political party. This is becausegifts that bolster a party'selection prospectsbenefit
all interestgroupsthat preferthe party'splatform.Onlythe interestgroupwith the greatest
relativepreferencefor the party is a candidateto contributetowardthis publicgood. We
find, moreover,that campaigngifts with an electoralmotive may be the exception,rather
than the rule. No group will give beyond what is needed to compensatethe party for
alteringits policypositionunlessthe grouphas an aggregatestakein policythat is relatively
large comparedto the stake of the electorateas a whole.
Finally,what of the electionoutcome?Ourmodelpredictsa uniqueequilibriumwhen
only a single interest group is organizedto offer contributionsto the parties. In this
equilibrium,the partythat is more popularex ante capturesa majorityof the seats in the
electedlegislature.The interestgroupcontributesmore to the more popularparty,and at
least compensatesthis party for choosing the less-popular,pliable policies. Thus, the
contributionsensure that the more popular party capturesat least as many seats as it
would in the absenceof any influence-seeking.
However,once there are severalinterestgroups that activelycompetefor influence,
our model allows scope for self-fulfillingprophesies.Each group'sgiving dependsupon
its expectationsabout the others. If a lobby expectsthe others to competevigorouslyfor
a certainparty'sfavour,then it too will have an incentiveto focus its effortson that party.
Then, if all happen to concentrateon the party whose candidatesand fixed programme
have less popular appeal, the result may be a legislaturein which this party capturesa
majority.In the aggregate,the lobbiesmay pay handsomelyto overcomevoters'resistance.
Still,each may be stuckwith this outcomeunlessthey reacha cooperativesolutionthrough
the use of side payments.

APPENDIX: STRICT MAJORITY RULE

We assumedin the main text that politicalpartiesseek to maximizetheirrepresentationin the legislatureand
that a partyholdinga majorityof seats may fail to implementits policyprogramme.Whilequite reasonableas
descriptionsof the politicalprocess,these assumptionsare admittedlysomewhatad hoc. In this Appendix,we
take a more "purist"approach,by assumingthat partiesmaximizetheirchancesof winninga majorityand that
the legislatureoperatesby strictmajorityrule. We concentrateon the symmetricequilibriumthat may emerge
whenthe two partiesareequallypopular.EqualpopularityimpliesF(O)=- andH(O) = 2, and,withthepreviously-
encounteredlinearityassumptionson F() and H( b= 0.
We now supposethat interestgroupmemberscomprisea negligiblefractionof the votingpopulationand
that voters'preferencesfor the fixedprogrammeof partyB are statisticallyindependent.Also, the total number
of voters, n, is large but finite. Then, the numberof votes for party A can be approximatedby a normal
distribution,with meanZ,c,F(A')+anH(AC) and varianceYic F(A')[1 -F(A')]+anH(AC)[l -H(Ac)], where
 GROSSMAN & HELPMAN ELECTORALCOMPETITION 285

A'_ ui(pA) - u'(pB) and AC=CA- C.23 PartyA wins the electionwith (approximate)probability

2
r(pA, pB, AC)=N( Z16iF(Ai) +anH(Ac)- (15)
,XZiIF(A')[1- F(A') + anH(Ac)[l -H(Ac)1I

whereN( ) representsthe standardizednormaldistributionfunction.

Each interestgroup designs its contributionscheduleto maximizethe aggregateexpectedutility of its
members.Recognizingthat with probability r( ) the legislaturewill implementthe policy vectorpA and with
probability I - r() it will implementthe vectorpB, lobby I chooses CIA(pA) and C/'(p8) to maximize
r( ) W(pA)+ [l - ir( )]W(p8)- Cj(pA ) - C,(pI), taking as given the contributionschedulesprofferedby the
otherlobbies.The partiessubsequentlyset pA andp8 to maximizeXrand I - it, respectively.
As before,we can treat each lobbies'problemas one of directcontrol. Lobby I choosespA, p B CIA and
C/lto maximizeits expectedutility,taking C1,(pA) and C,(p8) as given. It also recognizesthe participation
constraints,which requirethat each party achieveat least as great a probabilityof winningwhen settingthe
policy designatedby lobby l as it could be choosingan alternativepolicyand receivingnothingfromthe lobby.
That is, the lobby must respectthe inequality
7r[pA, pz CZ(pA ) + C1_C 1(pB)- >max r[p pll CAI (p) _CB (pll) _CII]

and a similarconditionfor partyB. We focus on symmetricequilibria,whereinCA(* ) = CR(*), lobbyI chooses

the same platformand contributionfor each party,and the participationconstraintsbind.
Letp7be the platformdesignatedby lobby1.The first-orderconditionfor maximizingthe lobbies'expected
utilitywith respectto the choice of plA implies
!VW,l(pl)+ (l-a)fVW(P (16)
)+VC-,(p7,)-0
ah

where we have made use of the fact that 7r(p', p', 0) =2 at the symmetric equilibrium.24
PartyA chooses its equilibriumplatform,pAo to maximizer[pA, pB?, CAo(pA) C"?(p?)] Againmaking
use of the symmetryconditions,PA, =pB =p and CAo(-)= C?( )=Co( ) this implies
(I - a)fV W(p?)+ ahVCO(p?)
=O. (17)
Consistencyrequiresp7=po for all 1. Thus, (16) and (17) imply

IVWI(p0) =VC/O(p), (18)

whichis another"localtruthfulness"result.Finally,combining(17) and (18) we find

(1-af
2? W(p?) +( a) VW(p0)= 0. (19)

The platformpo that satisfies(19) is the same as the platformpA, that satisfies(13) and the platformp8'
that satisfies(14), when s0=2. We see that, with equal popularity,the platformthat emergesin a symmetric
equilibriumwhen the legislatureoperatesby strictmajorityrule and partiesmaximizetheirchancesof winning
a majorityis the same as the platformthat emergesin symmetricequilibriumwhen partiesmaximizetheir
representationin the legislatureand a minorityplatformhas some chanceof beingimplemented.25

Acknowledgements WethankTim Besley,AvinashDixit,IanJewitt,TorstenPersson,andtwo anonymous

refereesfor helpfulcommentsand suggestions,and the National ScienceFoundationand the US-Israel Bi-
nationalScienceFoundationfor financialsupport.Grossmanalso thanksthe John S. GuggenheimMemorial
Foundation,the SumitomoBank Fund the Daiwa Bank Fund and the Center of InternationalStudies at

23. The approximationfollows from the Liapunovcentral limit theorem,which requiresalso that the
variancetermbecomesunboundedas n growslarge.For a discussionof the applicabilityof this theoremin the
contextof a probabilisticvoting model, see Lindbeckand Weibull(1987).
24. In deriving(16) we haveusedthe first-orderconditionwithrespectto CAto substituteout the Lagrange
multiplieron the participationconstraint.We have also made extensive use of the symmetryconditions,
0 A.RC;
P1Ao==pi
Bo=.
pi and C, = C/ = C?
25. This resultmimicsa similarfindingby Lindbeckand Weibull(1987), who assumedthat all votersare
informedvotersand that campaigncontributionsplay no role in the election.
286 REVIEW OF ECONOMIC STUDIES

PrincetonUniversity.Part of this work was carriedout while the authorswere visitingI.G.I.E.R. in Milan,
Italy and the EuropeanUniversityInstitutein Florence,Italy, Needless to say, these were very hospitable
environments.

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