Too Big to Lobby? Structural Estimation of the PE of Trade with Firms

• In Event: Firms and their political connections

Abstract

The current backlash against globalization is based on the perception that government agents are beholden to special interests, to the detriment of the wellbeing of the general public. This perception is problematic as it undermines the confidence democratic institutions. The backlash against political elites in Europe and the Americas in recent electoral cycles is a reflection of this trend. The backlash has been fueled by the belief that lobbying by large corporations is reflected in trade policies that result in unemployment, wage loss and growing inequality. Yet there is systematic evidence that few firms lobby and that lobbying activity (i.e., participation in lobbying) scales with size, but at at a decreasing rate. We also observe that the marginal effect of firm size on lobbying expenditure is low, and that a sizable number of large firms do not make contributions at all (Bombardini 2008). The finding that lobbying expenditures are small relative to size of the contributing firms and relative to the expected benefits accruing to those firms has been documented for other issue areas (Ansolabehere et al. 2003). To account for the puzzle of “missing lobbying” we develop a structural estimation of the political economy of trade where local decision-makers representing a district (or region) within a larger polity populated by numerous regions choose tariffs to maximize political support in the presence of lobbying by heterogeneous firms. Our strategy of combining theory and empirics allows for a direct comparison of the trade policy choices made in the shadow of lobbying, and the endogenous incentives to lobby by heterogeneous firms.

Authors

• Kishore Gawande, University of Texas at Austin

• Pablo Martin Pinto, University Houston

• Santiago Miguel Pinto, Federal Reserve Bank of Richmond