Political Agency and Implementation Subsidies with Imperfect Monitoring

Voters are frequently ill-equipped to monitor politicians’ actions. Politicians are expected to implement projects, whose benefits sometimes partially accrue to interest groups (IGs) and not entirely to voters. IGs thus have an incentive to affect which projects politicians implement by providing implementation subsidies to lower the cost of policymaking that politicians incur. This article shows how these considerations interact in a two-period political agency model with moral hazard and adverse selection. I study how the involvement of IGs in the policymaking process can affect voters’ welfare and show why voters might rationally not perfectly monitor politicians in the presence of IGs that might capture projects’ benefits and affect policymaking. (JEL D72, D73, D83)