Which Side are You On? Interest Groups and Relational Contracts

Abstract

This paper studies quid-pro-quo dynamic agreements between an interest group and two political parties. Political parties repeatedly compete for office. Before each election, the interest group decides which party to support. When in power, parties choose the rent they transfer to the interest group to buy its support. Yet, binding agreements are not possible, so agreements must be self-enforcing. When political fluctuations are mild, the interest group favors an opportunistic agreement in which it always supports the current incumbent. As political fluctuations increase, the interest group prefers an exclusive agreement in which it supports a single party even when it is in opposition. An interest group with more inefficient rents is also less likely to favor an opportunistic agreement. The model offers a novel explanation for why studies on the impact of campaign contributions on policymaking find mixed evidence. Besides, my results shed new light on existing empirical findings by showing that interest groups’ long-term loyalty does not necessarily imply an ideological alignment, and interest groups’ opportunism can be a sign of high-quality institutions. Lastly, I study the impact of crisis periods, weak political parties, and the interest group’s entry costs on the interest-group-optimal agreement.