The Political Economy of Protectionism and Industrial Policy

Working Paper No. 98-0111

31 Pages Posted: 14 Apr 1999

See all articles by Hadi Salehi Esfahani

Hadi Salehi Esfahani

University of Illinois at Urbana-Champaign

Munir Mahmud

Pennsylvania State University, College of the Liberal Arts - Department of Economic

Date Written: June 1998

Abstract

This paper develops a model of trade and industrial policy where the politicians in charge of the government can direct the rents generated by their policies toward their political or economic objectives through different channels: lobbying, taxation, regulation, and tariff and quota allocation. Different mechanisms are distinguished by their point of rent extraction and differences in resource waste for each dollar of transfer. In conjunction with industrial policy, specific asset formation is also endogenized. We show that many characteristics of the model's equilibria transcend specific channels of rent extraction that prevail. The parameters that represent the effectiveness of rent transfer through various channels play a mediating role. The results show that the relationships between these parameters and policy outcomes may be different from those based on single-channel models. We show that under reasonable conditions, a variety of parameter changes induce a positive relationship between the restrictiveness of policies toward domestic and foreign competition. This helps explain a number of important empirical regularities such as the positive association of protection with import penetration and output-capital ratio. The model also offers a guide for empirical research on the role of lobbying and other rent extraction mechanisms in policy-making.

JEL Classification: F13, L52

Suggested Citation

Esfahani, Hadi Salehi and Mahmud, Munir, The Political Economy of Protectionism and Industrial Policy (June 1998). Working Paper No. 98-0111, Available at SSRN: https://ssrn.com/abstract=150730 or http://dx.doi.org/10.2139/ssrn.150730

Hadi Salehi Esfahani (Contact Author)

University of Illinois at Urbana-Champaign ( email )

Department of Economics
1206 South Sixth Street, 210DKH
Champaign, IL 61820
United States
217-333-2681 (Phone)
217-333-1398 (Fax)

Munir Mahmud

Pennsylvania State University, College of the Liberal Arts - Department of Economic ( email )

524 Kern Graduate Building
University Park, PA 16802-3306
United States
(570) 450-3534 (Phone)
(570) 450-3182 (Fax)

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