David P. Baron
Interest groups seek to influence economic activity through public and private politics. Public politics takes place in the arena of public institutions, whereas private politics takes place outside public institutions often in the arena of public sentiment. Private politics refers to action by interest groups directed at private parties, as in the case of an activist group launching a campaign against a firm. This paper presents a model of informational competition between an activist and an industry, where both interest groups seek to influence public sentiment and do so by advocating their positions through the news media. Citizen consumers make both a private consumption decision and a collective choice on the regulation of a product that has an externality associated with it. In the absence of the news organization, the collective choice is not to regulate. The activist and the industry obtain private, hard information on the seriousness of the externality and provide favorable information to the news media and may conceal unfavorable information. The news media can conduct investigative journalism to obtain its own information, and based on that information and the information it has received from its sources, provides a news report to the public. Because of its role in society, the media has an incentive to bias its report, and the direction of bias is toward regulation. Its bias serves to mitigate both market failure by decreasing demand and a government failure by shifting votes in favor of regulation. The activist then has incentive to conceal information unfavorable to its interests, whereas the industry fully reveals its information.