Lobbying, Campaign Contributions and Political Competition

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