The Distributional Effects of Lobbying

How can firms influence the underlying economic structure in which they operate? To address this question we modify an heterogeneous firms model of monopolistic competition to include a lobbying game. In this setup, the market entry fee and the operating fixed cost are chosen by a non-benevolent policymaker that weights the potentially suboptimal welfare level its choice of policy entails against the political contributions it receives from special interest groups, a common agency problem. We identify differing policy objectives along the firm distribution which correspond to three distinct political scenarios. We describe the ex-ante market conditions that give rise to each case, characterize the resulting equilibrium policy induced by lobbying activity and contrast this political equilibrium with the baseline economy. Our results explain the reported link between lobby composition and levels of concentration within an industry, describe a political mechanism through which firms and policymakers are able to collude and capture economic rents and shed light on two outstanding puzzles in the literature - on the one hand, political contributions’ apparent lack of an effect on firms’ economic outcomes, and on the other, the increasing levels of concentration recently observed among industries in the American economy