Endogenous number of lobby groups in a specific factor trade model

The basic goal of this paper is to develop an endogenous trade policy model in the Grossman and Helpman (1994) tradition that could endogenise the number of lobby groups in the economy. The game has three stages. In the first stage, the consumer that owns a specific factor decides whether to organise or not in pressure groups. In the second one, the lobbies (organised groups of consumers) select the contributions (income transfers) they are willing to make to influence the government's actions. Finally, in a third stage of the game the government establishes the trade policy. This chapter highlights two main results. The first one is that contribution is a dominant strategy for each lobby group, thus the sub-game perfect equilibrium implies all the lobby groups being active (L=N). The second one is related with the welfare evaluation of this equilibrium. It is well known in the literature that this equilibrium is efficient (in a Pareto sense) but it is also important to analyse what happen when only the lobby welfare is considered. The conclusion is that being organised and defending a particular interest is better than not being organised, given that the others are not organised (or only some are), because it is possible to obtain an advantage in the political relationship with the government. On the other hand, since the other antagonic groups (one or some) are organised in lobbies, it is possible to reduce the damage from the distortions created by their influence on the government’s actions. An implication of this result is that many times in societies with a multiplicity of specific interests organised corporately, typically all finish in a worst situation than if they were not organised, arriving to a prisoner's dilemma outcome, if only the lobby’s welfare is considered.