Protection for sale with natural barriers to trade

This dissertation adopts a political-economy perspective to disentangle the mutual endogeneity of imports and protectionist trade policy. The theoretical contribution is an extension of the Protection for Sale model that includes heterogeneous firms, monopolistic competition and fixed costs of trade. The relationship between the import-penetration ratio and the degree of protection is shown to be nonmonotonic and does not depend on exogenous variation in political activity. Rather, variation in the fixed costs of trade produces industries that differ in their vulnerability to import competition and consequently place different values on protection. This effect is illustrated in both small-country and large-country versions of the model. The empirical contribution consists of a novel application of indirect inference and nonlinear GMM to estimate the structural parameters using U.S. data. Most notably, the estimates suggest that the U.S. government values political contributions from import-competing industries at approximately thrice the rate it values consumer welfare