Free-Riding on Protection for Sale

In the “Protection for Sale” model of Grossman and Helpman (1994), some industries are assumed to be able to overcome the free-rider problem and organize a lobby that represents their group interests while other industries are unable to form a lobby. This dichotomy presents a problem for the many papers that attempt to estimate the model empirically since every industry must be classified as either fully organized or completely unorganized and the data on campaign contributions do not reveal such a sharp distinction. This paper introduces free-riding into the GH model in a way that allows industries to be partially organized. The paper makes a distinction between cooperative lobbying, in which firms lobby in order to maximize the joint welfare of all firms in the industry, and noncooperative lobbying, in which each firm lobbies to maximize its own welfare. A move away from cooperative lobbying and toward noncooperative lobbying indicates greater free riding on the part of firms. Using data on U.S. trade barriers, we test the model empirically and find evidence of free riding by firms. JEL classification: F13, D72 1 Helen and Roy Ryu Professor of Economics and Government, Bush School of Government and Public Service, Texas A&M University, College Station, TX, 77843; [email protected]; phone (979) 4588034. 2 Department of Economics, Bucknell University, Lewisburg, PA 17837; [email protected]; phone (570) 577-1752.