ENTRY AND ASYMMETRIC LOBBYING: WHY GOVERNMENTS PICK LOSERS

Governments frequently intervene to support domestic industries, but a surprising amount of this support goes to ailing sectors. We explain this with a lobbying model that allows for entry and sunk costs. Specifically, policy is influenced by pressure groups that incur lobbying expenses to create re...

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Bibliographic Details
Published in:Journal of the European Economic Association 2007-09, Vol.5 (5), p.1064-1093
Main Authors: Baldwin, Richard E., Robert-Nicoud, Frédéric
Format: Article
Language:English
Subjects:
Asymmetry
Economic models
Government-business relations
Incumbents
Industrial economics
Industrial growth
Industrial policy
Industrial sectors
Industry
Lobbying
Nash equilibrium
Political economy
Rent-seeking
Tariffs
Trade policy
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Summary:Governments frequently intervene to support domestic industries, but a surprising amount of this support goes to ailing sectors. We explain this with a lobbying model that allows for entry and sunk costs. Specifically, policy is influenced by pressure groups that incur lobbying expenses to create rents. In expanding industries, entry tends to erode such rents, but in declining industries, sunk costs rule out entry as long as the rents are not too high. This asymmetric appropriability of rents means losers lobby harder. Thus it is not that government policy picks losers, it is that losers pick government policy.
ISSN:1542-4766
1542-4774
DOI:10.1162/JEEA.2007.5.5.1064