Essays in the political economy of trade policy

This dissertation looks at the causes and effects of protection. The first chapter looks at the nature of equilibrium trade policy when the formation of organized lobbies is endogenized. The second chapter looks at what kind of protection (i.e., tariffs or production subsidies) emerges in equilibrium. The third chapter is empirical and studies the effects of the reduction in protection on productivity growth, market structure, returns to scale and welfare levels.; The first chapter provides a theory of lobby formation (analogous to the endogenous market structure approach in industrial organization theory) within a framework for trade policy determination. Micro-foundations (through the Nash interaction among the members of the beneficiary group) are provided to the formation of lobbies. I find that under certain conditions, free trade can be an equilibrium outcome in extreme situations: either when the government is highly responsive to special interests or when it cares a great deal about social welfare. This chapter also shows that greater inequality in asset distribution results in a greater number of lobbies and in most cases a greater amount of protection for each of these lobbies.; The second chapter shows how in a model of strategic interaction between large firms in lobbying activity, the Nash equilibrium in the tariff regime may be better for the capitalists than the one in the subsidy regime. This is due to the congestion problem arising from the government's convex welfare costs of protection (in turn arising from the concavity of the welfare function). The congestion problem is stronger in the case of firm specific subsidies than for tariffs. If an organized lobby does not exist at the industry level, the free rider problem in the case of tariffs can to a large extent offset the congestion effect. If an industry association exists, co-ordination can be done when lobbying for tariffs, but not in the case of production subsidies.; The third chapter investigates the effects on competition and productivity growth of the dramatic 1991 trade liberalization in India. Firm-level data on a large sample of firms from a variety of industries provides strong evidence of a significant increase in competition (as reflected in the large reductions in price-marginal cost markups) and some evidence of an increase in the growth rate of productivity. The methodological framework used differs from earlier studies in that returns to scale are "allowed" to change after the liberalization, a relaxation of estimation restrictions that improves regression estimates and allows accurate computation of partial equilibrium welfare changes. Welfare analysis using the estimated parameters suggests an increase in welfare in each of the sectors analyzed.