Insuring rents

Abstract

Economists have long recognized the need for durability-enhancing mechanisms to facilitate political exchange, but the focus has been almost entirely on mechanisms that raise the cost of reneging on bargains once they have been struck. What happens if these mechanisms fail? This paper argues that politicians have an incentive to establish an insurance-like mechanism that indemnifies interest groups whose legislatively-created benefits have been reduced. I consider the role of the Department of Justice’s settlement authority in facilitating this type of transfer, and illustrate my argument by examining two recent settlements involving Citigroup and Bank of America. These settlements are notable not only because they involved the allocation of money to third-party groups who were not directly harmed by the alleged violations of federal law, but because both corporations were required to donate millions of dollars to housing counseling organizations whose subsidies Congress reduced following the 2010 midterm elections.