We develop a novel model of campaigns, elections, and policymaking in which the ex ante objectives of national party leaders differ from the ex post objectives of elected legislators. This generates a distinction between “policy rhetoric ” and “policy reality” and introduces an important role for “party discipline ” in the policymaking process. We identify a protectionist bias in majoritarian politics. When trade policy is chosen by the majority delegation and legislators in the minority have limited means to influence choices, the parties announce trade policies that favor specific factors, and the expected tariff or export subsidy is positive. Positions and expected outcomes monotonically approach free trade as party discipline strengthens. JEL Classification: D72, F13

We develop an equilibrium model of industrial structure in which the organization of firms is endogenous. Differentiated consumer products can be produced either by vertically integrated firms or by pairs of specialized companies. Production of each variety of consumer good requires a specialized component. Vertically integrated firms can manufacture the components they need, but they face a relatively high cost of governance. Specialized firms can produce at lower cost, but search for partners is costly, and input suppliers face a potential holdup problem. We study the determinants of the equilibrium mode of organization when inputs are fully or partially specialized.

We study patterns of foreign direct investment (FDI) in a multi-country world economy. We develop a model featuring non-homothetic preferences for quality and monopolistic competition in which specialization is purely demand-driven and the decision to serve foreign countries via exports or FDI depends on a proximity-concentration trade-off. We characterize the joint patterns of trade and FDI when countries differ in income distribution and size and show that FDI is more likely to occur between countries with similar per capita income levels. The model predicts a Linder Hypothesis for horizontal FDI, which is consistent with some patterns we find using establishment-level data on multinational activity.