DP7305 Lobbying competition over trade policy

Author(s): Kishore Gawande , Pravin Krishna , Marcelo Olarreaga

Publication Date: May 2009

Keyword(s): Interest groups , Intermediate goods , Lobbies , Political Economy , Trade policy

JEL(s): D72 , D78 , F12 , F13 , F14

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP7305.asp.asp

Competition between opposing lobbies is an important factor in the endogenous determination of trade policy. This paper investigates empirically the consequences of lobbying competition between upstream and downstream producers for trade policy. The theoretical structure underlying the empirical analysis is the well-known Grossman-Helpman model of trade policy determination, modified suitably to account for the cross-sectoral use of inputs in production (itself a quantitatively significant phenomenon with around 50 percent of manufacturing output being used by other sectors rather than in final consumption). Data from more than 40 countries are used in our analysis. Our empirical results validate the predictions of the theoretical model with lobbying competition. Importantly, accounting for lobbying competition also alters substantially estimates of the "welfare-mindedness" of governments in setting trade policy.