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Sector targeting and lobbying. Message : Social gains of export subsidies (Strategic Trade Policy) may be lost if the firms lobby for increased subsidies (“rent- seeking”) Lobbying costs reduce social welfare. The two extremes of lobbyism. Negotiations by firms aiming at free trade

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Sector targeting and lobbying

Sector targeting and lobbying

Message: Social gains of export subsidies (Strategic Trade Policy) may be lost if the firms lobby for increased subsidies (“rent- seeking”)

Lobbying costs reduce social welfare


The two extremes of lobbyism
The two extremes of lobbyism

  • Negotiations by firms aiming at free trade

  • Negotiations by firms that try to achieve protection and/or subsidies

  • All forms of lobbyism harmful?


The model
The model

  • (I)S=s+∂(L)

  • s: initial subsidy S: final subsidy L: input in lobbyism

  • (II)U=π-(s+∂(L))x

  • U: the government's welfare function π: profit "Domestic" x: production "Domestic"

  • π=p(x+y)x-c(x)+(s+∂(L))x-wL

  • p: price y:production "Foreign" c: variable costs

  • w: lobbying costs


Result
RESULT

  • "Smart" and "naive" government respectivel

  • "Smart" government - "Domestic” 

  • Πx=pxx+p-cx+(s+∂(L))≤0 

  • ΠL=∂Lx-w≤0 

  • ΠL=0→lobbyism

  • "Smart" government - "Foreign” 

  • Πy=pyy+p-cy=0

  • The Government 

  • MaxU=π(x*,y*,L*,s,w)-(s+∂(L*))x*

  • x*,y*,L* : firm optimum 

  • Us=x*pxys*-(s+∂(L*))xs*-wLs*


Maybe social gains of the subsidy will vanish
Maybe social gains of the subsidy will vanish?

  • Us(S=0)=x*pxys*-(∂(L*)xs*+wLs*)

  • Xs*>0, Ls*>0¹⁾, ys*<0, px<0

  • If x*pxys*< (∂(L*)xs*+wLs*) then a subsidy will lead to reduction in welfare

  • 1) A mistake in (11): Ls*=∂Lπyy*/∇>0


Assume that the subsidy has a positive effect on the welfare
Assume that the subsidy has a positive effect on the welfare

  • (III) s*=sB/S - w(Ls*/(xx*)-∂(L*)

  • where sB/S refers to the optimal subsidy in Strategic Trade Theory

  • (III) is inserted into (I) 

  • S*= sB/S - w(Ls*/(xx*)

  • (II) is written as  

  • U=π - S*x* 

  • /figure 1/

  • "Naive government" - see figure 1


Questions for discussion
Questions for discussion:

  • How shall governments deal with imitation when they formulate IP?

  • Can Governments (the EU) increase social welfare by involving private companies in STP and IIP?

  • Will the situation change if intermediaries such as Associations or Confederations of industries negotiate on behalf of the companies?

  • 3) What can be done to improve the legitimacy of lobbyisme?


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