Most accounts of why free trade is rare in practice turn on governments' responsiveness to special interests as well as the general population. In Discussion Paper No. 827, Research Fellows Gene Grossman and Elhanan Helpman adopt the political-support approach to policy formation to explain which lobbies will succeed in capturing private benefits from the political process and their preferences concerning the instruments used by the government for income redistribution.

In their model, incumbent politicians know that their policy choices may affect their re-election chances, and competing special interests seek to influence policy by making political contributions. In equilibrium, each bid for protection is optimal given the others, and politicians maximize their own welfare, which is a function of total contributions collected and voters' aggregate welfare. This model improves on reduced form approaches in which the government places fixed weights on the welfare of different groups, since changes in the international rules of the game are likely to affect the government's willingness and ability to protect particular interests.

Grossman and Helpman find that deviations from free trade will be smaller for industries with higher import demand or export supply elasticities, whose rates of protection also reflect their relative political strengths and the key features of the country's political economy. Lobbies that would fare well even if not represented enjoy a strong bargaining position and make relatively small contributions, while those that stand to lose significantly from foreign competition must contribute large sums to secure the protection they require. If most or all voters belong to lobby groups, then most of their efforts will offset each other, their political contributions will buy little and equilibrium policy interventions will be small; but they must still contribute to avoid yet worse outcomes. In such cases, the lobbies fare better the less efficient is the policy instrument available to the government for income redistribution.

Protection for Sale
Gene M Grossman and Elhanan Helpman

Discussion Paper No. 827, June 1993 (IT)