The Political Economy of Declining Industries: Senescent Industry Collapse Revisited

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.