Policy Reform and the Free-Rider Problem

We investigate policy reform in a modelwith both lobbying, which involves afree-rider problem, and ordinary rentseeking, which does not. These activitiesinvolve similar skills, so a reform whichreduces rents shifts labor into lobbying.Also, because of the free-rider problem,the marginal return to the industry fromlobbying may greatly exceed an individualfirm's return to lobbying. Thus, the shiftinto lobbying caused by rent reduction maylead to large increases in transfers to thelobbying industry. Under somecircumstances, a reform which reducesavailable rents increases total rents plustransfers to the industry.