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November 18, 2004

A Lobbying Game-- All-Pay Auction with Free Riding

Yesterday I had my students play this lobbying game in class:
For this game, some of you will be Manufacturing firms and some Agricultural firms. The President is deciding between two policies. Free Trade will yield $10 million in benefit to each agricultural firm. Protectionism will yield $10 million in benefit to each manufacturing firm. In each year, each firm will write down its favored policy and its lobbying expenditure, amount X, on a notecard and hand it in. Whichever policy has the most lobbying wins. If your favored policy wins, your payoff is 10-X. If it loses, your payoff is -X.
In my class, which lasted 50 minutes, I had 11 Ag firms and 10 Manufacturing firms. I imposed a limit of X=10 for a firm's annual lobbying. The pattern of lobbying went like this:
Year  Protection  (Manufacturing)   Free Trade (Agriculture)

1                    49                       48
2                    48                       61
3                     0                       30
4                    52                       43
5                    21                       25
6                    56                       42
It's interesting that the total expenditure was often near the total value of the policy prize over all the firms--100 or 110. Note, too, that the lobbying swung from high to low a couple of times.

Within each industry, the amount of lobbying varied tremendously, with lots of zeroes. The student who had the highest payoff over all rounds had a payoff of 30, because his policy won three times and he never did any lobbying. We'd expect that-- the free rider always does best, even though if everyone free-rides, the industry does badly because it always loses the policy battle.

This game is variant on the "all-pay auction", with the twist that the prize is a public good, going to any firm in the industry rather than just the one that bids highest. Thus, it adds that free-riding element. The theoretical equilibrium is in mixed strategies-- carefully chosen randomizations each year.

My lobbying game scoresheet and overheads of lessons and caveats is up on the G202 course website. This is a good game for classroom use, not just for teaching about free riding but also because it is administratively easier than a lot of classroom games. The payoff structure is very simple. After explaining the game, I made each student a separate firm, and gave them each a notecard on which to write their lobbying expenditure. Each student brought up his notecard to me, except in the last round, when I allowed an industry rep to collect them all (which allows for enforcement of deals they might make to all lobby high). For the first few rounds, I did not allow talking, and then I did allow it. The students were eager to talk with each other, and seemed to enjoy the game.

Posted by erasmuse at November 18, 2004 10:15 AM

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