Strategic Restraint

Abstract

Economic policy is often the outcome of a (political) game-contest between interest groups. Moreover, the contest between interest groups frequently involves a struggle between one group that defends the status-quo and other groups that challenge it by fighting for alternative policies. For example, a tax reform may involve a struggle between different industries. Existing pollution standards may be defended by the industry and challenged by an environmentalist interest group. A monopoly can face the opposition of a customers coalition fighting for appropriate regulation. Capital owners and a workers union can be engaged in a contest that determines the minimum wage, and so on. The outcome of the contest depends on the stakes of the contestants and, in turn, on their exerted (fighting, lobbying, rent-seeking) efforts. The realized, ex-post, payoff configuration of the interest groups depends on the policy proposal that actually emerges as the winner of the contest.