Political competition and bilateral direct investments

This paper investigates a basic question about the international political economy-why is international trade not free? To answer this question, we modified Grossman and Helpman (1994) by considering that interest lobbies make political contributions to both the incumbent government and the political challenger in order to influence the incumbent government's choice of trade policy. By examining the contribution schedules under a framework of bilateral direct investments, we find that the modified Ramsey rule still holds under our setting.