Habitual and Occasional Lobbyers in the U.S. Steel Industry: An Em Algorithm Pooling Approach

Article excerpt

BERNARD YEUNG [*]

Using U.S. steel firm data, we find that lobbying for import protection appears to be habit-forming. To identify heterogeneity in lobbying behavior among firms, we use an expectation-maximization algorithm to sort our firms into groups with different propensities to lobby and estimate the determinants of lobbying in each group. A two-pool model emerges: occasional lobbyers' lobbying depends on their market performance, and habitual lobbyers' lobbying only depends on past lobbying. The latter tends to be larger steel firms whose business is more focused in steel. Our evidence is consistent with dynamic economies of scale in protection seeking breeding protection-dependent firms. (JEL F13)

1. INTRODUCTION

Rent-seeking activities plausibly have dynamic economies to scale. Past rent-seeking experience should reduce the cost of further rent seeking and increase its return. Thus, rent seekers may, over time, become more prone to further rent seeking and even become dependent on it. Given the large welfare losses theoretically associated with rent seeking (e.g., Bhagwati [1982, 1988] and Magee et al. [1989]), a better understanding of actual rent-seeking behavior is required. In particular, empirical verification of the self-sustaining nature of rent seeking is of fundamental importance.

Lobbying for protection from import competition is a form of rent seeking. This article uses data on lobbying for protection by firms in the steel industry in the 1970s and 1980s to show that a habit-forming effect does exist. In a preliminary investigation, we pool all firm-level data and find that past lobbying increases the current tendency to lobby. However, not all firms have the same propensity to lobby. To allow heterogeneity among firms' dependence on past lobbying, we apply an expectation-maximization (EM) algorithm approach (Dempster et al., 1977) to a lagged-dummy model (Heckman, 1982a, 1982b). This lets our firms sort themselves into groups according to the determinants of their lobbying activity.

Our statistical results suggest that an acceptable division of our data is a division into two groups: occasional lobbyers, whose lobbying depends on the firm's market performance; and habitual lobbyers, whose lobbying is essentially unrelated to the firm's business situation and depends mainly on past lobbying. Firms that never lobby for protection end up in the first group. Greater firm size and greater focus in steel production are associated with increased lobbying in both groups, but the influence is stronger for occasional lobbyers. Past sales growth and spending on modern equipment are associated with curtailed lobbying by occasional rent seekers but are unrelated to lobbying by habitual rent seekers. Changes in cash flow have no influence in either. Generally, habitual lobbyers are larger firms whose business is more concentrated on steel. They are naturally more inclined than occasional lobbyers to initiate lobbying. However, their lobbying appears to have become a habit divorced from their market pe rformance. These results are consistent with the presence of economies of scale in rent seeking and with rent seeking being habit-forming (e.g., Magee et al., 1989).

In the next section, we describe the intensive lobbying for protection in the U.S. steel industry in the 1970s and 1980s. We justify our contentions that lobbying for protection by steel firms in the sample period may be habit-forming and that different groups of firms should have dissimilar propensities to lobby for protection. In section III, we explain the EM algorithm approach. We explain the data in the fourth section and report our results in section V. Section VI concludes.

II. HABITUAL AND OCCASIONAL LOBBYING IN THE U.S. STEEL INDUSTRY

In the United States, domestic firms under import competition pressure often complain to the government about "unfair" foreign practice. …

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