A cartel of 16 firms is lobbying for a bill that will bring a tax break of $100,000
to firm 1 and $90,000 to each of the other firms. They are in competition
with another interest group lobbying against the proposed bill. This other
group has invested $40,000 in its lobbying campaign. It is estimated that the
probability of adoption of the bill is proportional to the budgets of the two
competing campaigns. Thus, if the industry gathers x thousands of dollars,
the probability of adoption of the bill is x/(x + 40). The expected profit of
firm i contributing xi (thousands of dollars) to the campaign is
u1(x1, ..., x16) = 100 ·
x
x + 40
− x1,
ui(x1, ..., x16) = 90 ·
x
x + 40
− xi, i = 2, ..., 16
where x =
P
i xi.
a) Calculate each firm’s equilibrium contribution and the total lobbying
investment (approximate
p
10 by 3.15).
b) Show that there is only one firm contributing to the lobbying investment
and all other firms free-ride, and that the contributing firm has the
smallest expected profit (work hard and get less).
1