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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. Negotiations by firms aiming at free trade

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Sector targeting and lobbying

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  1. 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

  2. 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?

  3. 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

  4. 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*

  5. 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

  6. 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

  7. 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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