Grossman and Helpman (1994) develop a model in the international context where a politician’s continuance in office is dependent not only on obtaining the support of the general electorate but in currying favour with special interest groups. Incumbents need financial contributions for a variety of reasons. They may need a large war chest to deter potential political rivals, or to pay for political advertising to sway uninformed voters or to retire campaign debt. Thus politicians are willing to offer trade and subsidy policies for sale. While they care about maximizing social welfare (since they need to appeal to the informed voter), they also care about the amount of financial contributions they can generate. Given the mixed incentives of politicians (a weighted average of social welfare and campaign contributions), the policies that are chosen in equilibrium will deviate from the socially optimal. Compared to free trade (the socially optimum), the prices of goods produced by lobby groups will be higher through the use of tariffs or export subsidies. In this context, the subsidies that are provided to a specific industry are not intended to correct a market failure, but to improve the economic standing of the special interest group, who in turn will reward the incumbent. - The World Trade Report 2006
Posted on: Wed, 15 Oct 2014 07:46:19 +0000
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