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A Study on the Persistence of Comparative-Disadvantage Industries

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In the age of globalization, the problem of industrial adjustment is still high on the agenda. This paper attempts to explain why the comparative-disadvantage industries still persist even though they do not have any competitive advantage. By introducing an explicit lobbying process, we show that a self-interested government will always be more receptive to the demands of lobby groups in comparative-disadvantage industries. Specifically, if a government cares sufficiently about political contributions, it has an incentive to adopt a more favourable policy towards firms in declining sectors. This result supports empirical studies which focus on why industries in declining sectors often lobby more successfully for policy concessions. Furthermore our outcome provides one reason explaining why comparative-disadvantage industries contract more slowly over time.