Lobbying, Campaign Contributions and Political Competition

We study how lobbying affects political competition and policy outcomes. Two parties compete in an election where each of them can receive support from a lobby in the form of monetary contributions for campaign spending in exchange for a certain position in the political spectrum. The trade-off for the political party is that more campaign spending increases the chances of winning the election but the ideology of the lobby is not aligned with that of the median voter. We study the game played between the lobbies, each of which offers a contract to one party specifying a policy position and a campaign spending contribution, and the parties, each of which decide whether to accept such contract and if not how to compete against the other party. We explore how lobbying and political competition affect polarization, campaign spending and welfare. Our results match and explain empirical findings.