December 2020

IZA DP No. 13924: Strategic Compromise, Policy Bundling and Interest Group Power

revised version forthcoming in: European Journal of Political Economy, 2022

Policy reforms are often multifaceted. In the rent-seeking literature policies are usually taken as one-dimensional. This paper models policy formation using a political contest with endogenous policy proposals containing two dimensions. The two dimensions provide an opportunity to trade off one policy over another to make the lobbying opposition less aggressive. In a first stage, the Government proposes a reform over the two policies, and in a second stage engages in a contest with an Interest Group over the enactment of the proposed reform. As a result, the Government makes a compromise, under-proposing in the policy the Interest Group opposes and over-proposing in the policy the Interest Group desires. Effectively, there will be strategic bundling of desired policies with undesired ones in an attempt to increase enactment probability and overall utility.