where ∆ ≡ Π2Π11 [∏H1 - ∏H2h0(z)] ∏H1 > 0 and Π11 - Π12h0(x) + ∆∕Π11 < 0 to
assume stability. It follows that x = x(s), βH = βH (s) and z = z(βH (s), s) are the
equilibrium functions with:
dx
ds
dβH = h0(z)ΠH3
ds ΠH - h0(z)ΠH
Q 0 if Π1H3 R 0
ddβ = 0
ds
dn
ds
dβH -1 dz Π1H3
R 0 if Π1H3 R 0
= —,—h(x) Q 0 and ~r = -7—й----τ^—τn
ds ds Π1H1 - h0 (z)Π1H2
which proves the Proposition. Q.E.D.
Appendix B: The political economy of export promotion
Let us explicit a welfare function for the domestic country. Define C (s)=
C [z(s),βH (s), s] as a reduced form for the social cost of the policy, which we as-
sume increasing and convex: for instance, in case of subsidies, this is the tax revenue
necessary to finance them. The the optimal policy of export promotion is:
sH = arg max W (s) = argmax[∏H — C(s)]
which satisfies the first order condition:
SI + ΠH = C0(sH ) (20)
In the text, we derived optimal export subsidies/taxes under both closed and compet-
itive markets.
Here I want to extend the model to take into account the lobbying activity of the
exporting firm, which Grossman and Helpman (1994) have shown to be one of the
main determinants of export policy, since exporters represent a minoritarian but well
organized part of the society. The easiest way to endogenize lobbying is to imagine
that the government chooses its policy to maximize a weighted average of welfare and
firm’s profits:
s =argmax[(1- λ)W(s) + λπH] = arg max [πH - (1 - λ)C(s)]
where λ is the weight given to the profits of the firm because of lobbying activity.
Given λ, the equilibrium policy will satisfy the first order condition:
SI + Π3H =(1- λ)C0 (s) (21)
which delivers a policy sH (λ) increasing in λ, that is in the weight given by the
politician to the firm’s profits in its objective function, and equal to the optimal one
if this weight is zero (sh (0) = sH ). We will derive an example of a politico-economic
equilibrium policy in the next section. Notice that the strategic incentive to adopt
export promoting policies is the same undel lobbying, just the costs of the policy
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