Working Paper: NBER ID: w8756
Authors: Richard E. Baldwin; Frédéric 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 appropriablity of rents means losers lobby harder. Thus it is not that government policy picks losers, it is that losers pick government policy.
Keywords: lobbying; government policy; declining industries; asymmetric appropriability
JEL Codes: F1; L5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Industry status (declining) (L16) | Lobbying intensity (higher) (D72) |
| Sunk costs (D24) | Lobbying intensity (higher) (D72) |
| Lobbying intensity (higher) (D72) | Government support (increased) (H59) |
| Industry status (expanding) (L89) | Lobbying intensity (lower) (D72) |
| Lobbying intensity (lower) (D72) | Government support (decreased) (H53) |