Moral Hazard and Free Riding in Collective Action

Most political and economic theorists point to moral hazard in teams as the main obstacle to lobbies’ collective action. In this paper, we address this important issue with a coalition-formation game. In the process of doing so, we characterize equilibrium lobby structures both in the absence and in the presence of moral hazard. Three notable results emerge from such an exercise: (1) an equilibrium lobby structure exists under both specifications of the model, (2) moral hazard in teams may raise large groups’ equilibrium lobby size, and (3) it may also raise the level of collective action of large groups with low organizational costs.