Book Description

The third chapter of this dissertation builds the firm selection channel in Melitz (2003) into the "protection for sale" model and yields novel predictions on the relationship between a sector's degree of firm heterogeneity and level of trade protection. We assume heterogeneous firms lobby the government for protection in the unilateral setting (as well as liberalization in the cooperative setting). A lower domestic tariff imposed on a sector will raise prices of the imported varieties and drive out relatively weaker foreign exporting firms, but will allow some less productive (and thus smaller) domestic ones to survive. In each sector, lobbying activities are (endogenously) dominated by larger firms that face the trade-off between driving out weaker foreign competitors (with a higher tariff) and weeding out less efficient domestic competitors (with a lower tariff). We are able to derive explicit formulas for the protection structures across different sectors, in both the unilateral and the cooperative setting. In particular, we link the "curvatures" of the productivity distributions of both domestic and foreign firms in a sector to the sector's endogenous tariff level. We find that how a sector's domestic firm heterogeneity impacts its protection level depends on whether the political economy consideration is dominant, and that how a sector's foreign firm heterogeneity affects its protection level hinges on whether the home government sets tariffs unilaterally or cooperatively.