The Political Economy of International Factor Mobility

Economic theory suggests that free international movement of production factors is efficient. Nearly all countries, however, use their sovereignty to restrict immigration and influence the flows of foreign direct investment. In this paper we model the endogenous determination of policy towards international factor mobility. In a common agency setting, domestic interest groups bid for protection from the government and the incumbent politicians maximize a welfare function that depends both on domestic voters' welfare and contributions collected. We characterize equilibrium policies and show how the degree of complementarity among inputs determines the outcome. For the strategic environment under consideration, we also establish a general equivalence result between tariffs and quotas. The predictions of the model are then tested on a sample of OECD countries. Political contributions impact policies, although the weight attached to social welfare is estimated to be far larger than that of contributions in the government's objective function.