The political economy of influence: how lobbying shapes institutions and social welfare at the local level

Abstract This paper examines how lobbying shapes institutional quality and social welfare at the local level. We develop a political-economy framework in which lobbying does not directly alter government objectives but erodes institutional integrity, thereby weakening the capacity of public policy to generate welfare gains. Social welfare is modelled as a function of institutional quality, which is strengthened by public spending and undermined by lobbying pressure within a multi-level governance structure linking organization-level influence, municipal institutions, and regional well-being. Empirically, we assemble an unbalanced multi-level panel for Italy over 2011–2022, combining lobbyist-level lobbying expenditures, municipal institutional quality (MAQI), regional public spending, and regional multidimensional well-being (BES). To address endogeneity and unobserved heterogeneity across lobbyists, municipalities, regions, and time, we estimate a fixed-effects two-stage least squares model. Results show that lobbying intensity is negatively associated with institutional quality, whereas public spending is positively associated with institutional performance. Institutional quality, in turn, is positively and robustly related to social welfare, supporting an institutional mediation mechanism. Overall, the findings indicate that fiscal resources translate into welfare improvements primarily when institutional resilience is preserved, highlighting governance quality as a key determinant of welfare outcomes in decentralized systems.