Interest Group Lobbying and Corporate Strategy

We study corporate non-market strategies designed to influence the lobbying behavior of other special interest groups. We focus on conditions under which costly lobbying is an informative signal to policymakers about the true state of the world, and in which stringent policy is so costly to the firm that the firm is not viewed as a credible source of informa- tion. We study three corporate non-market strategies: 1) the ''bearhug,'' in which the firm subsidizes the lobbying activities of an interest group before the true state of the world is known, 2) ''astroturfing,'' in which the firm subsidizes the lobbying activities of a group with similar views after the state of the world is known, and 3) self-regulation, in which the firm voluntarily limits the potential social harm from its activities. All three of these strategies can be used to reduce the informativeness of lobbying. We identify conditions under which each strategy is profitable for the firm. All three strategies, however, reduce the welfare of the public decisionmaker.