On the formation of industry lobby groups

This paper provides a step towards a more complete theory of lobbying, exte nding the menu-auction model of Grossman and Helpman [Grossman, G.M., Helpm an, E., 1994. American Economic Review 84, 833-850] A new explanation is pr oposed for why more concentrated industries more easily overcome the free-r ider problem inherent in political collective action. Instead of focusing o n transactions costs as Olson [Olson, M., 1965. The Logic of Collective Act ion, Harvard University Press, Cambridge, MA], we show that more collusive industries with higher collusive profits have a greater incentive to form l obby groups and to contribute to industry lobbying. Moreover, more pollutin g industries also have a greater incentive to form and contribute to a lobb y group. (C)2000 Elsevier Science B.V. All rights reserved. JEL classificat ion: H2; L13; L2; L5; Q2.