Seminar: Elena Paltseva, Copenhagen University.

Title: Protection for Sale to Oligopolists.

Abstract:

In the Grossman and Helpman's (1994) canonical "Protection for Sale" model political competition between different industry lobbies is purely driven by their interests as consumers. This paper introduces demand linkages and oligopolistic competition into "Protection for Sale" framework to address the rivalry among lobbies due to product substitutability. It shows that increased substitutability weakens the interest groups' incentives to lobby, leading to more moderate protection rates. So, the original model overstates lobbies' desire for protection. This result suggests an explanation to the known puzzle of the empirical studies of "Protection for Sale", which commonly find that interest groups have surprisingly little impact on the government trade policy decision. The paper also analyses endogenous lobby formation, suggesting that demand linkages may adversely affect industry decision to get organized.