| With industry lobby groups and optimizing politicians, I have derived trade policies endogenously for a small open economy using game-theoretic approach. I have extensively studied the effects of linkages among industries on their structure of endogenous protection for vertically related industries, horizontally related industries, and for industries which have multiple linkages both through production and consumption.; In vertically related industries, I have found that the structure of protection of a downstream (upstream) industry depends on the nature of backward (forward) linkages. Among other results, I have shown that in Nash equilibrium, a downstream industry may support the protection of an upstream industry (a case so far considered a puzzle).; In the second model, I have incorporated a non-traded good which is horizontally linked with the traded good and have shown that a non-traded industry can derive protection by lobbying in trade policy formulation. Even if only the non-traded good industry is organized, it distorts what otherwise would have been the free trade situation. It is shown that if the traded and the non-traded good industries are producing gross substitutes (complements) the lobby groups representing these two industries reinforce (cancel) each others' efforts to obtain higher profit.; In the third model, I have studied the effects of multiple linkages among industries on the structure of protection. It is shown that there is no one-to-one correspondence between the representation of an industry by a lobby group and its protection through an import tariff or export tax. The net effect of lobbying of an industry depends on how its lobbying activity is neutralized or reinforced by other lobby groups. This model could explain the protection episodes of sugar, sugar user, textile, apparel and wheat industries in the United States.; Besides deriving various theoretical results, given taste and technology parameters. I have solved the three-stage game of endogenous trade policy numerically and computed the Pareto efficient frontier. The frontier may be a single point or a line segment. If the frontier is a single point, the game has a unique truthful Nash equilibrium, whereas if it is a line segment, it has a continuum of truthful Nash equilibria. |
