Selective Promotion of Industries and Picking WinnersAmy Jocelyn GLASS*Department of Economics, Texas A&M University, College Station, TX 77843November 4, 2008AbstractCan export subsidies raise domestic welfare even when the governmentdoes not know how pro…t-shifting potential varies by industry? If manyoligopolies all use a factor available in …xed su pp ly, the government needsto give larger export subsidies to industries with larger pro…t-shifting poten-tial. Although the government cannot tell how industries di¤er, supposethe industries do know how much each subsidy level will increase theirpro…ts. If each industry can lobby the government over the level of subsidyreceived, the equilibrium matches the allocation of subsidies under f ull in-formation. Lobbying reveals the information required to properly allocatesubsidies across industries.Keywords: Export Subsidies, Cournot Oligopoly, LobbyingJEL Classi…cation Numbers: F12, F13, L13, L52*Phone (979) 845-8507; fax (979) 847-8757; e-mail [email protected] Promotion of Industries and Picking Winners 21. IntroductionBrander and Sp encer (1985) model how export subsidies can in-crease national welfare. Such subsidies shift pro…ts from foreign todomestic …rms in Cournot oligopolies. However, the government musthave extensive knowledge of the industry to discern the pro…t-shiftingpotential of possible subsidies: “an important assumption is thatthe government understands the structure of the industry.” Bran-der and Spencer note that informational requirements may impedeimplementation of export subsidies: “in a world of imperfect informa-tion and imperfect governments, any argument indicating a plausiblenational motive for subsidies may open the door for various kinds ofsocially wasteful rent-seeking.” These statements raise doubts regard-ing whether a government can use export subsidies to raise nationalwelfare in situations of imperfect information.Moore and Suranovic (1993) suppose that the government has se-lected which industry to subsidize, but cannot credibly commit to asubsidy level. Once a proposed subsidy level is announced, the domes-Selective Promotion of Industries and Picking Winners 3tic …rm can lobby the government to increase its subsidy. As a result,the government must propose a lower subsidy level to o¤set the lob-bying pressure expected from the targeted industry. The lobbyingthere plays no informational role in helping the government select thesubsidy level that maximizes domestic welfare.Governments may also experience di¢ culty in determining whichindustries to target. Dixit and Grossman (1986) demonstrate thatwhen multiple oligopolistic industries use a common factor availablein …xed supply, a uniform subsidy to all industries promotes none andmerely bids the price of the …xed factor higher by the amount of thesubsidy. To raise domestic welfare, the government must target theindustries with the greatest pro…t-shifting potential (per unit of thecommon …xed factor). Dixit and Grossman acknowledge that “thecorrect calculation of the choice of industries for targeted subsidies in-volves some subtle reasoning and quite demanding information.” Mostoligopolistic industries do employ scientists and other common factorsavailable in …xed supply. Thus the informational di¢ culties inherentSelective Promotion of Industries and Picking Winners 4in targeting the right industries do appear to reduce the bene…ts ofexport subsidies in practice.This paper suggests lobbying may reduce the informational burdenfacing governments trying to target industries that share a common…xed factor. Export subsidies can raise national welfare despite thegovernment’s imperfect information about which industries have thegreatest pro…t-shifting potential. Rent-seeking behavior can guide thegovernment towards an allocation of subsidies across industries thatraises domestic welfare. Brander and Spencer’s fears that rent seekingmay be socially wasteful ignore that rational lobbying equates the costof lobbying with the bene…ts and thus reveals useful information aboutpro…t shifting potential.Suppose the government lacks the information needed to selectwhich industries to subsidize. The government announces that it seeksinformation from industries concerning their suitability for receivingan export subsidy. Firms respond by lobbying the government togive them their ideal subsidy, the subsidy level that most bene…tsSelective Promotion of Industries and Picking Winners 5their lobby. Each industry o¤ers an implicit contribution schedule,o¤ering larger donations the larger the increase in pro…ts due to thegovernment’s chosen allocation of export subsidies.Being in‡uenced by industry lobbying permits the government toproperly select the subsidy level for each industry that maximizes over-all domestic welfare. Lobbying reveals private industry information.Industries with larger pro…t-shifting potential o¤er larger contribu-tions for each subsidy level. The government must simply allocatesubsidies to maximize the contributions it receives. Consequently,export subsidies can increase domestic welfare even when the govern-ment has incomplete information if the government allocates subsidiesin response to lobbying pressures.Section 2 expands the Brander and Sp encer (1985) model for theproduction stage to include the resource constraint described by Dixitand Grossman (1986) limiting the e¤ectiveness of uniform subsidiesacross all industries. Section 3 adds a lobbying stage where …rmslobby the government by o¤ering to make contributions re‡ecting theirSelective Promotion of Industries and Picking Winners 6pro…t performance based on the allocation of export subsidies. Thus,in the lobbying equilibrium, lobbying the government for subsidies re-veal private industry information. This equilibrium implements theallocation of targeted subsidies (as described by Dixit and Grossman1986) that raises domestic welfare, but in the absence of any govern-ment information concerning each industry’s pro…t-shifting potential.Finally, Section 4 draws conclusions and extensions.2. ProductionThe model considers a continuum of Cournot duopolies, each withan opportunity to lobby the government for an export subsidy. Theindustries are each composed of a domestic …rm competing againsta foreign …rm. All sales occur in a third country, eliminating e¤ectson national welfare through