Uncertainty-driven symmetry-breaking and stochastic stability in a generic differential game of lobbying

Abstract

Abstract We study a 2-player stochastic differential game of lobbying. Players invest in lobbying activities to alter the legislation in her own benefit. The payoffs are quadratic and uncertainty is driven by a Wiener process. We consider the Nash symmetric game where players face the same cost and extract symmetric payoffs, and we solve for Markov Perfect Equilibria (MPE) in the class of affine functions. First, we prove a general sufficient (catching up) optimality condition for two-player stochastic games with uncertainty driven by Wiener processes. Second, we prove that the number and nature of MPE depend on the extent of uncertainty (i.e. the variance of the Wiener processes). In particular, we prove that while a symmetric MPE always exists, two asymmetric MPE emerge if and only if uncertainty is large enough. Third, we study the stochastic stability of all the equilibria. We notably find, that the state converges to a stationary invariant distribution under asymmetric MPE. Fourth, we study the implications for rent dissipation asymptotically and compare the outcomes of symmetric vs asymmetric MPE in this respect, ultimately enhancing again the role of uncertainty.