Heterogeneous Firms and Lobby Participation Decision

The study analyzes the lobby participation decision of a firm in the heterogeneous firms model. To endogenize the lobby participation decision at firm-level, an additional stage in the standard political economy of trade policy framework has been introduced. This additional stage entails information about the lobby participation decision of a firm. By assuming fixed and sunk costs associated with lobby participation, we have shown that the firm with productivity above a threshold level can only afford to engage in the lobby. Moreover, the lobby participation decision depends not only on the participation cost but also on the market size and the benefits of lobbying. Our results conform to empirical findings related to the lobbying participation behavior of firms.