Trade Policy & Lobbying Effectiveness: Theory and Evidence for India

The objective of this paper is to quantify Lobbying Effectiveness for trade policy. I introduce this measure into Grossman and Helpman’s (1994, American Economic Review 84: 833–850) model of protection-for-sale (PFS). Two alternate factors are suggested to explain differences in lobbying effectiveness across sectors; first, predisposition of the government to supply protection (owing arguably to a perception bias to certain lobby groups that present their policy stance better); and second, the ability to organize and lobby for protection (based on market structure). Applying this framework to Indian data, I begin by estimating the traditional PFS model with a new measure of political organization. Then using panel data, I estimate lobbying effectiveness measures for the manufacturing sector. Additionally, I examine the political economy determinants of lobbying effectiveness in the context of Indian trade policy. The findings are a first for India and suggest an overall strong competition effect than any free-riding in lobbying for trade policy. First, for the most effective sectors, a high output to import ratio translates to higher trade protection; for the least effective/ineffective sectors, higher output to import ratio translates to lower trade protection. Second, sectors with geographically concentrated firms are more effective in lobbying, and effectiveness declines with an increase in product substitutability within sectors.