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Free Riding and Protection for Sale
Article Abstract:
Olson hypothesized that a latent group's ability to organize and contribute toward providing a public good might be jeopardized by free riding. The politics of trade protection feature the collective action problem, since protection benefits all firms in the industry including those who contributed nothing to attaining it. This paper examines the extent of free riding in lobbying over tariffs in the context of the Grossman and Helpman (1994) protection-for-sale model in which industry lobbies seek to bend government policy in their favor. Previous investigations of the model have produced the puzzling result that governments are largely welfare-maximizing and care little about campaign contributions, in contrast to numerous examples of welfare-reducing policies that have in fact been bought cheaply by special interests. We think the result arises because the model assumes away free riding by firms which hinders industry's ability to organize politically. We introduce free riding into the Grossman–Helpman model, allowing industries to be partially organized. Using a new data set on US trade barriers, we test the model using estimation methods new to this literature. The estimates support the model's predictions and reveal that the extent of free riding by manufacturing firms can help resolve the puzzling result.
| Free Riding and Protection for Sale was authored by Kishore Gawande and Christopher Magee. It was published by Oxford in ISQ in 2012. |
