Interest Groups and Trade Policy

Gene M. Grossman is the Jacob Viner Professor of International Economics at Princeton, where he is the Director of the International Economics Section. Elhanan Helpman is Professor of Economics at Harvard University and the Archie Sherman Professor of International Economic Relations at Tel Aviv University.

• Introduction 1 1. Special Interest Politics 2 2. Articles in this Collection 7 2.1. Part I: Methodology 7 2.2. Part II: Applications to Trade Policy 11 3 Empirical Validation 17 References 21 PART I: INSTRUMENTS OF INFLUENCE 23 1. Common Agency and Coordination: General Theory and Application to Government Policy Making (with Avinash Dixit) 25 1. Introduction 25 2. General Theory 28 2.1. Equilibrium 28 2.2. Truthful Equilibria 32 2.3. Quasi-Linear Preferences 34 3. Application to Government Policy Making 35 References 41 2. Electoral Competition and Special Interest Politics 43 1. Introduction 43 2. Related Literature 45 3. The Model 47 3.1. The Voters 47 3.2. The Parties and the Government 49 3.3. The Special Interests 50 3.4. Political Equilibrium 52 3.5. Functional Forms 54 4. Equilibrium with One Lobby 54 4.1. Contributions with Only an Influence Motive 56 4.2. When Is an Electoral Motive Operative? 59 5. Equilibrium with Several Lobbies 61 6. Summary 67 APPENDIX 69 Strict Majority Rule 69 References 71 3. Competing for Endorsements 73 1. The Literature on Political Endorsements 77 2. The Model and a Benchmark 79 3. A Neutrality Result 84 4. Effective Endorsements 85 4.1. Mechanical Endorsements 86 4.2. Strategic Endorsements 92 5. Welfare 95 6. Conclusions 98 APPENDIX 100 Statement and Proof of Proposition 4 100 Proof of Proposition 5 104 References 107 PART II: TRADE POLICY 109 4. Protection for Sale 111 1. Overview 114 2. Formal Framework 116 3. The Structure of Protection 119 4. Political Contributions 126 5. Why Lobbies May Prefer Trade Policies 132 6. Summary and Extensions 134 References 136 5. Trade Wars and Trade Talks 139 1. Introduction 139 2. Model Outline and Relation to the Literature 141 3. The Formal Model 143 4. Trade Wars 147 5. Trade Talks 157 6. Conclusions 168 References 170 6. Politics and Trade Policy 173 1. Introduction 173 2. Political Economy Approaches 175 2.1. Direct Democracy 175 2.2. Political Support Function 178 2.3. Tariff-Formation Function 180 2.4. Electoral Competition 184 2.5. Influence-Driven Contributions 186 3. Double-Edged Diplomacy 191 3.1. Trade Wars 192 3.2. Trade Talks 193 3.3. Free Trade Agreements 194 References 197 7. The Politics of Free Trade Agreements 199 1. Analytical Framework 201 1.1. Objectives of Economic and Political Agents 202 1.2. The Political Game 204 1.3. Economic Equilibria Under an FTA 205 1.4. Effects of an FTA on Economic Interests 207 2. Unilateral Stances 208 3. Equilibrium Agreements 212 4. Industry Exclusions 219 4.1. Unilateral Stances 219 4.2. Bargaining over Industry Exclusions 224 5. Conclusions 228 APPENDIX 229 Contributions to Foreign Governments 229 References 232 8. Foreign Investment with Endogenous Protection 233 1. Introduction 233 2. Basic Model 236 2.1. Consumption and Production 237 2.2. The Special Interest Group and the Government 239 2.3. Multinationals 242 3. DFI and Protection 243 3.1. Tariff Response Curves 243 3.2. Profit Differential Curves 244 3.3. Entry 244 3.4. Equilibrium DFI and Protection 246 4. Does DFI Benefit the Average Voter? 249 5. Workers Versus Capitalists 251 6. Conclusions 255 References 255 Index 257

"These readings showcase Grossman and Helpman's contributions to our understanding of how lobbying and interest groups affect international trade policy. Many people will want to have this collection on their shelf."--Robert Feenstra, editor, Journal of International Economics