ENDOGENOUS PUBLIC POLICY, POLITICIZATION AND WELFARE GIL S. EPSTEIN and SHMUEL NITZAN Bar-Ilan University Abstract In the two-stage political-economic game that we study public pol- icy is the outcome of the interaction between interest groups and a two-tier government. Implementation of a policy proposed by a bu- reaucrat requires approval by an elected politician. The objective func- tion of the bureaucrat hinges on the weight assigned to social welfare relative to the rent-seeking outlays of the interest groups. This weight represents the degree of politicization of the government. Our main result is that, in contrast to common belief, increased politicization need not adversely affect the public well-being. 1. Introduction The political-economic game that we study fits representative democracies in which public policy is shaped by a two-tier government 1 and the affected interest groups. In government there are two levels of decision making. Bu- reaucrats work out the details of the proposed public policy while elected politicians make the final decision on the approval or rejection of the pro- posed policy. Our stylized model thus captures the hierarchical nature of the decision-making process and the division of labor in government deci- sion making between bureaucrats and politicians. It takes into account the significant role of the agenda setters as well as the important role of the ac- Gil S. Epstein, Department of Economics, Bar-Ilan University, 52900 Ramat-Gan, Israel; CEPR, London, and IZA, Bonn ~epsteig@mail.biu.ac.il! . Shmuel Nitzan, Department of Eco- nomics, Bar-Ilan University, 52900 Ramat-Gan, Israel ~nitzans@mail.biu.ac.al! . We are grateful to the participants of PET 2000 conference for helpful comments. We are also indebted to a referee and to an associate editor for their constructive comments. Received September 2000; Accepted January 2001. 1 Endogenous policy models usually neglect the fact that public policy is often the outcome of decisions made by both elected politicians and bureaucrats. See, however, Hoyt and Toma ~1989! , Mazza and van Winden ~1999! and Swank, Letterie, and van Dalen ~1999! who analyze public policy determination using alternative models of two-tier decision-making bodies. © 2002 Blackwell Publishing, Inc. Journal of Public Economic Theory,4 ~4! , 2002, pp. 661–677. 661