Asymmetry and Corrective Public Policy in Contests.

The proposal of an inefficient policy usually stimulates a political struggle between the affected interest groups. The resulting wasteful lobbying activities may reduce welfare, even if the proposed policy is not approved. In this paper we show that sufficient asymmetry in payoffs not only tends to reduce lobbying efforts in standard rent-seeking contests, as is well known, but it is, in fact, a necessary condition for the implementation of a successful effective corrective tax-transfer policy that complements the proposal of the inefficient policy. Such a policy induces an efficient equilibrium outcome which is, in addition, optimal from the viewpoint of the players that take part in the public-policy game. Copyright 2002 by Kluwer Academic Publishers