The Political Economy of Declining Industries: Senescent Industry Collapse Revisited

38 Pages Posted: 19 Mar 2001 Last revised: 16 Aug 2010

See all articles by S. Lael Brainard

S. Lael Brainard

Deputy National Economic Advisor, The White House; National Bureau of Economic Research (NBER)

Thierry Verdier

Paris School of Economics (PSE); Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: December 1993

Abstract

One of the most robust empirical regularities in the political economy of trade is the persistence of protection. This paper explains persistent protection in terms of the interaction between industry adjustment, lobbying, and the political response. Faced with a trade shock, owners of industry-specific factors can undertake costly adjustment, or they can lobby politicians for protection and thereby mitigate the need for adjustment. The choice depends on the returns from adjusting relative to lobbying. By introducing an explicit lobbying process, it can be shown that the level of tariffs is an increasing function of past tariffs. Since current adjustment diminishes future lobbying intensity, and protection reduces adjustment, current protection raises future protection. This simple lobbying feedback effect has an important dynamic resource allocation effect: declining industries contract more slowly over time and never fully adjust. In addition, the model makes clear that the type of collapse predicted by Cassing and Hillman (1986) is only possible under special conditions, such as a fixed cost to lobbying. The paper also considers the symmetric case of lobbying in growing industries.

Suggested Citation

Brainard, S. Lael and Verdier, Thierry, The Political Economy of Declining Industries: Senescent Industry Collapse Revisited (December 1993). NBER Working Paper No. w4606. Available at SSRN: https://ssrn.com/abstract=253138

S. Lael Brainard (Contact Author)

Deputy National Economic Advisor, The White House ( email )

Old Executive Office Building
725 17th Street, NW
Washington, DC 20502
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Thierry Verdier

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014
France

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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