LOBBYING AND ADJUSTMENT IN DECLINING INDUSTRIES

This paper explains the persistence of protection in terms of interaction between industry adjustment, lobbying, and the political response. Faced with a trade shock, owners of industry-specific factors can respond in two ways: they can undertake costly adjustment, or they can lobby politicians for trade protection and thereby mitigate the need for adjustment. The choice will depend on the relative returns from adjusting relative to lobbying. By introducing an explicit lobbying process, it can be shown that the current level of protection is an increasing function of past protection, and that declining industries contract more slowly over time the more responsive are politicians to lobbying. In addition, the model makes clear that the type of senescent industry collapse predicted by Cassing and Hillman (1986) is only possible under fairly special assumptions about the technology of lobbying.