Working Paper: CEPR ID: DP5671
Authors: Richard Baldwin; Frdric Robert-Nicoud
Abstract: Governments frequently intervene to support domestic industries, but a surprising amount of this support goes to ailing sectors. We explain this with a lobbying model that allows for entry and sunk costs. Specifically, policy is influenced by pressure groups that incur lobbying expenses to create rents. In expanding industry, entry tends to erode such rents, but in declining industries, sunk costs rule out entry as long as the rents are not too high. This asymmetric appropriability of rents means losers lobby harder. Thus it is not that government policy picks losers, it is that losers pick government policy.
Keywords: lobbying; sunk costs; sunset industries
JEL Codes: H32; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lobbying efforts (D72) | government policy outcomes (D78) |
| expanding industries rents (R38) | new entry (Y20) |
| new entry (Y20) | rents (R21) |
| sunk costs (G31) | quasi-rents (D33) |
| asymmetry in appropriability (D82) | asymmetric incentive to lobby (D72) |
| asymmetric incentive to lobby (D72) | greater lobbying efforts from declining industries (L52) |