Openness, lobbying, and provision of infrastructure.

(31) For example, only 2% of the population pays income tax in India (British Broadcasting Corporation 2004). The ratio of tax revenue to GDP is 18.2% in a sample of developing countries, compared to 37.9% for OECD countries, according to Auriol and Warlters (2005).

(32) Since there are two domestic firms in the closed economy and only one in the open economy, lobbying under the closed economy may be less effective because of free-rider problems. However, in the specific case in which the government auctions off its policy as in the Grossman-Helpman (1994) model, these free-rider problems will not exist.

(33) When [alpha] = 0, note from Equation 19 that the government cares only about firm profits minus the cost of infrastructure. The government neglects three other global effects of its infrastructure investment: benefits to domestic consumers, benefits to foreign consumers, and benefits to the foreign firm in both markets. Under linear demand and costs and symmetry across countries, benefits to domestic and foreign consumers together equal the loss to the foreign firm in the two markets.

(34) A natural interpretation of a may be that different groups in the economy may simply be better at lobbying than others. Lobbying and political decision-making processes without any direct costs to lobbying activity, as in the Grossman and Helpman (1994) framework, may also lead to similar outcomes.