The Arbitrage Lobby: Theory and Evidence on the Political Economy of Dual Exchange Rates

42 Pages Posted: 23 Jun 2018 Last revised: 9 Nov 2020

Date Written: August 15, 2019


Foundational theories of trade politics emphasize a conflict between consumer welfare and protectionist lobbies. But these theories, developed to describe the United States, ignore other lobbies that shape trade policy elsewhere. We propose a theory of trade distortion arising from conflict between consumer welfare and importer lobbies. We estimate the key parameter of the model—the government’s weight on welfare—using original data from Venezuela, where Hugo Chávez used an exchange-rate subsidy to underwrite hundreds of billions of dollars of imports. Whereas estimates from traditional models would make Chávez look like a welfare maximizer, our results indicate that he implemented distortionary commercial policy to the benefit of special interests. Our analysis underscores the importance of tailoring U.S.-based models to account for differences in regime type and interest group configuration. The politics of commercial policy is not reducible to the politics of protectionism.

Keywords: Exchange Rates, Interest Groups, Import Subsidies, Lobbies, Political Economy, Trade, Venezuela, Hugo Chávez

JEL Classification: D72, D78, F13, F14

Suggested Citation

Gulotty, Robert and Kronick, Dorothy, The Arbitrage Lobby: Theory and Evidence on the Political Economy of Dual Exchange Rates (August 15, 2019). Available at SSRN: or

Robert Gulotty

Independent ( email )

Dorothy Kronick (Contact Author)

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

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