Partial Verifiability Induced Contests and Inefficient Policy-Making

Abstract

First-price menu auctions (i.e., common agency) and all-pay auctions are two of the main tools used to formalize and understand political behavior. In this paper, I propose a common agency model in which the interest groups are only able to partially verify and condition the transfers. This model turns out to be a form of all-pay contest, since the interest groups play using mixed strategies. Surprisingly, an interest group equipped with better verification technology may actually bid less. Since the probability of winning is not always monotonic with respect to a verification technology, social welfare may decrease even as verification technologies improve. I argue that this is due both to the official's incentive constraint and to the flexibility of the interest groups' incentive schemes.