Endogenous Tariffs in a Common-Agency Model: A New Empirical Approach Applied to India

Laure C. Dutoit, University of Lausanne, Switzerland
Olivier Cadot, University of Lausanne, Switzerland
Jean-Marie Grether, University of Neuchâtel, Switzerland
Marcelo Olarreaga, University of Geneva, Switzerland

Abstract

This paper proposes a new method to test the Grossman-Helpman model of endogenous protection and lobby formation, which does not require data on lobby formation or contributions. It identifies politically organized industries using commonly available trade and production data, as well as the model’s structural parameter estimates. Applied to India, it yields results that are qualitatively consistent with the model’s predictions and that seem quantitatively more plausible than estimates given for the US by alternative methods. Our estimates imply that the weight put by the Indian government on contributions by politically organized sectors is a third of the weight it puts on (gross) social welfare, well above existing estimates for the United States.