Social welfare and the group size paradox

Abstract

Tullock (1967) argues that the welfare costs of tariffs and monopoly extend beyond traditional deadweight loss measures to include both resources devoted to obtaining the transfer and resources spent resisting the transfer. This includes resources spent lobbying the government for the implementation of a favorable policy. Olson (1965) argues that lobbying activity frequently provides a nonexcludable good to an interest group and therefore may be subject to a free-rider problem. I use a Tullock (1980) style contest to analyze how the free-rider problem, the extent of the deadweight loss and bias in the policy process interact in determining the social loss resulting from lobbying activity. For plausible parameter values, an increase in the ability of the group potentially subject to the transfer to overcome the free-rider problem worsens social welfare by increasing expenditure in the transfer-seeking game even as it makes the distortion inducing transfer less likely. There are also plausible parameter values under which an increase in the bias of the policy process towards the group seeking the transfer raises social welfare by reducing expenditures in the transfer seeking game even as it makes the distortion inducing transfer more likely.