Competing for loyalty: The dynamics of rallying support

TitleCompeting for loyalty: The dynamics of rallying support
Publication TypeJournal Article
Year of Publication2017
AuthorsIaryczower M, Oliveros S
JournalAmerican Economic Review
Date Publishedoct
AbstractWe consider a class of dynamic collective action problems in which either a single principal or two competing principals vie for the sup-port of members of a group. We focus on the dynamic problem that emerges when agents negotiate and commit their support to princi-pals sequentially. We show that competition reduces agents' welfare with public goods, or if and only if there are positive externalities on uncommitted agents, and increases agents' welfare with public bads. We apply the model to the study of corporate takeovers, vote buying, and exclusive deals. (JEL D42, D62, D72, D82, G34, H41) Collective action problems can make groups weak and ineffective. This issue is particularly problematic when an external principal can exploit the incentives of individual members to free ride on each other, leading the group to inefficient or inferior outcomes. This free-riding problem appears in major applications throughout economics, including public economics (public good provision), political economy (vote buy-ing), and industrial organization (exclusive deals). The classic reference is Grossman and Hart (1980), on corporate takeovers. Grossman and Hart show that externalities across shareholders can prevent takeovers that add value to the company. The idea is that since shareholders who do not sell can capture the increase in value brought by the raider, no shareholder will tender his shares at a price that would allow the raider to profit from the takeover. The problem is particularly severe when the principal contracts with agents sequentially (Rasmusen, Ramseyer, and Wiley Jr. 1991; Segal and Whinston 2000; Genicot and Ray 2006), as is often the case in practice in political endorsements, vote buying, and exclusive deals.