Lobbying, Growth and Inequality: A Directed Technical Change model with game-theoretic microfoundations

Abstract We analyze the effects of lobbying on growth and inequality in a novel directed technical change model, where lobbying can seek rents and decrease entry or increase demand. To that end, we develop a microfounded theoretical game that models generalized lobbying decisions. In this framework, firms from different sectors can either compete or collaborate in their lobbying efforts. The model reveals that lobbying incentives are stronger when fixed costs are low and when shared sources of lobbying efficiency outweigh sector-specific ones. When lobbying increases demand, it also promotes economic growth and, when goods are gross substitutes, also increases inequality. In contrast, when lobbying focus on seeking rents and decreasing entry, it has the opposite effects. Given our results, it is essential for policy to distinguish between the main features of lobbying practices, and to design targeted incentives in order to effectively influence growth and inequality. JEL Classification: J31, P16, O30, O41.