Political Economy

Mitigating Policy Uncertainty: What Financial Markets Reveal About Firm-Level Lobbying

Elections can lead to substantial policy changes and, thus, are a significant source of risk. Firms can respond to such policy uncertainty by lobbying, but it is hard to quantify whether they do so and, if so, how much lobbying benefits them. We construct a new dataset and leverage investors' expectations of variability in stock returns in the aftermath of the 2020 US presidential election to generate a new firm-level measure of exposure to policy uncertainty. We show that lobbying reduces policy uncertainty, and that this result holds even after controlling for selection into lobbying and sectoral heterogeneity. We then develop and quantify a model of heterogeneous firms with endogenous lobbying. We find that affecting policy through lobbying is costly and the returns from it are highly skewed and rapidly diminishing. Thus, while lobbying expenditures reduce the impact of policy risk, few firms anticipate sufficient gains to invest in it.

Kristy Buzard, Nathan Canen, Sebastian Saiegh

Explaining Gradualism in Trade Agreements: A Political Economy Approach

A notable feature of many international trading relationships is the gradual way in which barriers to trade have been dismantled in the post-war period (Bhagwati, 1988). Most notably, large-scale tariff reductions within the framework of the GATT/WTO have come as a result of a series of nine rounds of negotiations that began in 1947. From a theoretical point of view, it is not clear why this process should either proceed in stages or be inherently time consuming. But if one begins from the assumption that free trade is efficient, it makes sense to look for mechanisms related to whatever frictions have led to trade being restricted in the first place. I argue that one important reason that inefficient tariffs are maintained is the exertion of political power by inefficient import-competing industries. When an industry encounters a shock to its support such as a key politician losing an election or an important committee position, its ability to maintain its current level of protection is reduced. The resulting loss of protection and therefore rents can lead to erosion of future political power and accompanying protection. I will make this argument using a dynamic model of political economy. I plan to provide supportive evidence from peril point investigations in the early rounds of the GATT negotiations.

Temporary Trade Barriers: When Will They End?

{Under WTO law, temporary trade barriers such as antidumping duties must be removed after a period of four or five years. However, under rather vague legal conditions, they can be renewed. This institutional environment provides the structure to carefully study the determinants of the extit{length} of protection. We present a theoretical political-economy model of the renewal process and find that the probability a temporary trade barrier will be renewed decreases in the level of trade agreement tariffs and is also likely to decrease in the level of the anti-dumping duties. An increase in an industry's profitability is shown to increase the probability of renewal also increases. Lobbying effort also increases the probability for a fixed strength of the lobby, while the strength of the lobby itself has more nuanced effects on the renewal probability.

Self-enforcing Trade Agreements and Lobbying

'In an environment where international trade agreements must be enforced via promises of future cooperation, the presence of an import-competing lobby has important implications for optimal punishments. When lobbies work to disrupt trade agreements, a Nash reversion punishment scheme must balance two conflicting objectives. Longer punishments help to enforce cooperation by increasing the government's costs of defecting, but, because the lobby prefers the punishment outcome, this also incentivizes lobbying effort and with it political pressure to break the agreement. Thus the model generates an optimal length for Nash reversion punishments, and it depends directly on the political influence of the lobbies. Trade agreement tariffs are shown to be increasing in the political influence of the lobbies, as well as their patience levels.'

Trade Agreements in the Shadow of Lobbying

This paper presents a model of international trade agreements in which the executive branches of each government negotiate agreements while the legislative branches, subject to political pressure from firms, can disrupt them. Lobbying is in the style of Grossman and Helpman's ‘Protection for Sale’ model with a new feature: all actors face uncertainty arising from the complexity of the legislative process. I demonstrate that the higher the executives set tariffs in a trade agreement, the less effort lobbies put forth to prevent its ratification. Thus trade agreements act as a domestic political commitment device: executives set relatively high tariffs to discourage lobbying and increase the chance that the agreement will be ratified. The model sheds light on the empirical puzzle surrounding governments’ welfare weights in the Grossman and Helpman model and provides a new explanation for failures to ratify trade agreements.

Lobbying and Legislative Uncertainty

This paper seeks to understand how uncertainty affects the incentives for lobbying and the associated prospects for the passage of legislation. We introduce a model of vote buying in which there is uncertainty about the ideological positions of legislators with information about this uncertainty symmetric among all players. When legislators' voting behavior cannot be perfectly anticipated in this manner, the model is able to describe various realistic aspects of lobbying and voting behavior. For example, it predicts that lobbyists on both sides of an issue may be active at the same time, that moderate legislators and those about which there is average uncertainty receive more bribes than those that are ideologically extreme, and that ideal points gross of bribes need not be equalized. Estimating ideal points using a logistic item response model, we find support for these predictions in U.S. House of Representatives roll call data.

Kristy Buzard, Sebastian Saiegh