Caps on Political Lobbying: Reply

Yeon-Koo Che and Ian L. Gale (1998) (CG, hereafter) studied the impact of imposing a cap on lobbying expenditures. They showed that a cap may lead to (a) greater expected aggregate expenditure, and (b) a less efficient allocation of a political prize. In their comment, Todd Kaplan and David Wettstein (2006) (KW, hereafter) show that if the cap is not rigid (i.e., its impact on the cost of lobbying is continuous) it has no effect. KW employ the same basic framework as CG, except for the assumption that a bid of x costs a lobbyist c(x) for a strictly increasing, continuous function, c . Imposition of a cap raises costs to the strictly increasing, continuous function, c . To see why the cap has no effect on lobbying expenditures in that setting, think of a lobbyist choosing a cost, c [0, ), rather than a bid. The lobbyist who chooses the higher cost necessarily makes the higher bid because the lobbyists have the same strictly increasing cost function. The functional relationship between bids and costs does not matter, so the cap has no effect. We explore the reasons for the different results and we show that CG’s results can still hold in a more general environment. Two components underlie CG’s analysis: (a) a cap will constrain the stronger lobbyist, thereby leveling the playing field; and (b) this will intensify competition, raising the expected aggregate expenditure. In the case of KW’s nonrigid cap, the first effect does not arise since the stronger lobbyist can always outspend the weaker one. This does not vitiate the second component, however. As will be seen, when the cap has an equalizing effect, it will intensify competition, with the predicted effect on expenditures. Below we characterize the precise nature of an “equalizing shift” in costs. More important, we will describe plausible circumstances under which a nonrigid cap can generate an equalizing shift when lobbyists differ in their costs of lobbying. (For instance, one lobbyist could be a more effective fundraiser than the other.) In such a case, a cap on lobbying reduces the competitive gap between the lobbyists, and it may cause the expected aggregate expenditure and the probability of misallocation to rise, just as in CG.