Political Economy of Strategic Trade Policy: Menu-Auctions with Imperfect Competition

Abstract:     
This paper applies the Dixit-Grossman-Helpman (1994, 1997) common agency model to investigate the formation of strategic export subsidy and strategic import tariff. The results of this paper indicate that even with political pressure, the Dixit-Grossman-Helpman politically-determined ex-port subsidy is identical to the Brander-Spencer rent-shifting export subsidy. The politically-determined import tariff will be higher than the optimal level. This paper highlights the possibility that lobbying can restore the level of trade intervention to a more efficient one in the absence of the benevolent dictator. Joint lobbying is also considered and the results indicate that joint lobbying on export subsidy improves domestic welfare due to the elimination of the resource wasted in lobbying.

Keywords: Lobbying, Strategic Trade Policy, Imperfect Competition

JEL Classification: F12, F13

working papers series