Essays in Political Economy: strategic interactions among firms, interest groups and policy makers

This thesis is the collection of three stand-alone theoretical contributions in which Game Theory is applied to analyse different issues connected to the interaction between the economic, political and institutional domains, which I believe are particularly relevant in the present context and have not been sufficiently addressed in the economic literature The first essay discusses the effects on the quality of the decision generated by the introduction of a watchdog advisor, who provides policy recommendations to an incumbent, where these recommendations are costly to be ignored. Through a simple model, it is shown that, if both incumbent and advisor are sensitive to the pressure from an Interest Group, the positive impact of the latter is very small, even though not null. Moreover, by characterising the conditions that allow this effect, it is shown that if the bureaucrat's recommendation is too binding, the decision power moves from the incumbent to the bureaucrat, producing a reduction in accountability without any improvement in the quality of the decision taken. The second essay is part of the growing literature on partial decentralisation, and in particular of the strand pointing out that one of its possible side effects is a reduction in accountability because voters are imperfectly informed about each government contribution. The specific contribution of this essay is to take into account the possibility for politicians to directly manipulate this asymmetry in information. The paper presents a simple model in which two levels of government are involved in the provision of a local public good with the local government that can decide to spend its budget either on the provision of the public good or in spending that influences the information of the voters in its favour. A central result is that the conflict of interest that arises among the levels of government reduces the spending in the public good at both levels, while it generates a wasteful spending to pander to voters. The third essay discusses the incentive for firms to externalise the environmental damage caused by the production process depending on the number of firms active into the market, provided that firms can form a lobby to influence the environmental regulation. The analysis is conducted through a model of Cournot competition where, at the beginning of the game, firms have to decide whether to internalise the cost generated by their polluting production process or not. Firms that decide not to internalise this cost are subject to a linear taxation over production whose level is the result of a political game between the lobby of the firms that have decided not to internalise and a government characterised by different policy objectives that include the reduction of the externality level. The first result is that no matter of the specific policy objective, the share of firms that decide to internalise the cost is increasing in the number of firms present into the market. The second result is that, in general, the share of internalising firms is the highest if the government is interested only in minimising pollution. Finally, if the government is interested in consumers' Surplus, then either no firm chooses to internalise, if the number of firms is small enough, or all firms choose to internalise.