either: (1) principal-agent conflicts of interest<sup>18</sup> (efficiency/rent-extraction), and/or (2) interest group politics<sup>19</sup> (equity/rent-seeking); it is possible to combine the insights of the two modeling traditions<sup>20</sup> into one simple model. This exercise, of formally modeling the political economy of public policymaking, enables the generation of a rich set of implications, which can: (1) generate predictions about different actors’ interest, preferences and perceptions of the utility of current equilibrium outcomes (nature of the public health care system), and, consequently, (2) in conjunction with substantive assumptions regarding the impact of institutional reform on equilibrium outcomes, predict the welfare implications and perceived support for different reform proposals (see the next sub-section). Therefore, the modeling exercise serves as an essential basis for developing sophisticated and context specific hypotheses regarding the perceptions of and the impact of institutional change on, stakeholder perceptions of the public health care system.

# **The Model**<sup>**21**</sup>

As in Persson (1998, p.311) and Persson and Tabellini (2000, p.161-163) let us consider a polity in which individual voters (policy consumers) belong to different but equally powerful interest groups _j_  1... _j_  _n_ , and _J_  3 , each group has a set of members with a cumulative density which equals to 1. Individuals in any given group _j_ have the same homogenous preferences<sup>22</sup> :

> 18 The notion that the public sector agencies may have their own private agendas was first developed by members of the Virginia School of Political Economy/Public Choice School. With respect to the autonomy of public sector agents the seminal contribution is Niskanen (1971). Recent seminal contributions include Shleifer and Vishny (1998).

> 19 Bernheim, B.D., and M.D. Whinston. "Exclusive Dealing." National Bureau of Economic Research Cambridge, Mass., USA, 1996.; Grossman, G.M., and E. Helpman. "Technology and Trade." National Bureau of Economic Research Cambridge, Mass., USA, 1994.;  Coe, D.T., and E. Helpman. "International R&D Spillovers." <u>European Economic Review</u> 39.5 (1995): 859-87.; Persson, T. "Economic Policy and Special Interest Politics." The Economic Journal 108.447 (1998): 310-27.; and Persson, T., G.E. Tabellini, and I. Gasparini. Institute for Economic Research. <u>Political Institutions and Policy Outcomes: What Are the Stylized Facts?</u> : Centre for Economic Policy Research, 2001, pp.172-174.

> 20 Models of lobbying which incorporate bureaucratic behavior and the political process include Laffont and Tirole (1993)bureaucratic capture- and legislative oversight of the bureaucracy (Horn, 1994).

> 21 This model is a close adaptation of Persson (1998) also available in Persson and Tabellini (2000), pp.172-174. Specifically, the model developed below incorporates the possibility that the public sector (agent) may have its own independent agenda (rentextraction) and does not merely cater to the demands of organized (rent-seeking) and unorganized groups.

> 22 Expression (1.01) is almost the same as  Expression 1 in Persson (1998, p.311)

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