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Political integration, special interests and growth

Final Activity Report Summary - POLINT (Political integration, special interests and growth)

1: Rent seeking, market structure and growth:
We construct a model where firms compete in both political and economic markets. In political markets, firms compete for influence over government transfer policy (rents). This activity can be beneficial for the firm, but is purely wasteful from the point of view of society because resources are utilised to achieve a redistribution of income. In the economic market, firms compete for market share through cost reducing technological innovation. Market structure plays an important role in this economy because competition drives firms to invest more in innovation resulting in higher growth. Rent-seeking affects economic growth in two important ways. It diverts resources away from innovation and it affects the number of firms that are supported in equilibrium. The former has a negative effect on growth while the latter effect is ambiguous, depending on whether rent seeking induces entry or exit. This market structure effect depends on a combination of political and economic factors that the theory highlights.

2. Economic Integration, Political Integration or Both?
The paper studies the effects of economic and political integration by presenting a model in which firms compete with each other in both an economic market - where they produce a good and compete for market share - and in a political (rent seeking) market - where they compete for transfers from the government. Growth is driven by firms' cost-reducing innovation activity and economic and political integration affect firms' incentive to innovate differently. In this setting, economic and political integration can be seen as complementary. Economic integration, when not accompanied by political integration, can lead to less innovation and slower growth as firms respond to increased competition in the economic market by focusing more on rent seeking activity. When economic integration is accompanied by political integration, innovation and growth will always increase.

3. Political Constraints to Growth in an Economic Union.
This paper studies the political economy of growth in an economic union. In the spirit of Acemoglu, Aghion and Zilibotti (2006), as the economy approaches the world technology frontier, structural reforms that increase competition in intermediate goods sectors are necessary to boost innovation and productivity growth. Reforms, however, raise the opposition of incumbents and, therefore, are politically difficult to implement. When there are important cross-border policy spillover effects, national governments are more easily captured by vested interests, as they fail to internalise the benefits of reforms on the rest of the union. In this situation, productivity growth may be sluggish and the economy can fail to converge to the frontier. On the other hand, when policy is chosen by a union government (or a collective body that takes into account union welfare), the internalisation of spillovers raises the perceived benefit of reforms and, consequently, lowers the ability of lobbies to obtain high levels of protection.

4. Why Lisbon Fails.
This paper is focused on the problems of the Lisbon process. We show that the weak political governance of the Lisbon Agenda (which is centred on the peer pressure of national governments) and the ensuing inability to complete the single market in non manufacturing sectors, explains the Lisbon failure.