Transaction costs and the political economy of trade policy

This dissertation is a collection of three papers on industrial structure and international trade policy issues. The first paper is a theoretical study in the political economy of trade policies and their effect on industrial growth. It starts with the observation that lobbying for trade interventions should be accompanied by activities that endogenously restrict entry into each sector. Existing models of trade policy have ignored this point because they tend to focus on the role of lobbies representing factors of production. However, actual lobbying is carried out by firms and factors within each sector and unless most factors are specific to individual sector, the rents they generate would be quickly dissipated by new entry. The paper argues that viewing rent-seeking activities of firms as attempts to restrict entry by foreign as well as domestic firms offers new insights into the patterns of trade policy and industry characteristics.;The second paper is an empirical investigation of the political and economic forces which influence trade policy. We experimented with U.S. data. While most empirical studies on this issue included all variables in a linear fashion to simplify estimation, our estimation was strictly guided by our model developed in the first paper and showed that political effectiveness does indeed matter for determining the extent of protection when they are used interactively with other variables in the system.;The third paper provides a transaction cost explanation to the pattern of industrial expansion in the ready-made garment sector of Bangladesh. It shows how economic policies through their effect on property rights can change transaction cost and thereby affect economic outcome. The paper argued that low transaction cost is the cause of the observed predominantly horizontal industrial expansion in the ready-made garment sector of Bangladesh. It also showed how economic policies at different stages affected the expansion pattern by changing the transaction cost of operation in this sector. The paper also explains why a similar expansion did not take place in the linkage industries and how the scope of post contractual opportunism and the requirement of transaction specific assets play the key roles in this regard.