Suppose that this ideological spectrum is defined only by a tariff rate policy.
Assumptions of the model:
There are two competing political parties.
The objective of each party is to get elected.
Voters differ in the tariff they prefer.
Each party has to decide on the level of the tariff imposed (this is the only policy
available).
What policies will the two parties promise to follow?
Both parties will offer the same policy consisting of the tariff that the median
voter (the voter who is exactly halfway up the lineup) prefers.
Voters are lined up in the order of the tariff rate they prefer.
If one party proposes a high tariff, the other party can win over most of the
voters by offering a somewhat lower tariff leading to the tariff preferred by the
median voter.
Thus, the median voter theorem implies that a two-party democracy should enact
trade policy based on how many voters it pleases.
A policy that inflicts large losses on a few people (import-competing
producers) but benefits a large number of people (consumers) should be
enacted into law.
But trade policy doesnt seem to follow this prediction.
Collective Action
This approach views political activity as a public good.
For instance, the imposition of a tariff protects all firms in an industry,
but the lobbying costs for imposing the tariff are covered by only a
few firms.
Trade policies that impose total large losses that are spread among many
individual firms or consumers may not face opposition.
This model would predict that the Industries that are well organized (or have a
small number of firms) get protection.
Modeling the Political Process Trade Policy for Sale (Baldwin and Magee)
Interest groups buy policies by offering contributions contingent on the
policies followed by the government.
The size of the gains for the winners from protection and the number of
individuals in that group.
Benefit (or loss) to each producer = PS / (number of produces)
The size of the losses from losers from protection and the number of
individuals in that group
Benefit (or loss) to each consumer = CS / (number of consumers)
These results have received strong empirical support (from Duttaand Mitra 2002).
The Protection for Sale Model of Grossman and Helpman (1994)
The median voter model assumes that policies are determined by majority vote.
This is an overly simplified description of representative democracies where the
electorate votes for legislators, who then determine the policies. In such settings the
policies chosen will be jointly influenced by votes, voice, and dollars from the
campaign contribution of lobbying groups.
In this model output is produced using mobile labor and a sector specific capital.
Every one owns a unit of labor. But the sector specific capital in each industry i is
owned by Hi members of the society. H people earn return to labor and sector
specific capital.
A subset of these industries are organized into lobbies and the others are unorganized.
The purpose of each lobby is to provide contributions to the government for
influencing the tariff/subsidy schedule.
The government values campaign contributions, but also weighs these against the
consume welfare of all individuals.
The resulting government action hinges on two counter balancing forces: campaign
contributions and welfare of the median voter. In this model it is possible (but not
very likely) that unorganized industries receive import subsidies or export taxes
serves as a way to lower their domestic prices and therefore benefit consumers.
This Model has received strong empirical support for the U.S. from Goldberg and
Maggi (1997 and 1999).
Empirical tests of the model show that the weight of consumer welfare in the
government objective function in the US is between 50 to 100 times higher than the
weight of political contributions. But in China the state-owned enterprises have a
weight that is between 4 and 7 times greater than that given to consumers!