On the Internalization of Cross-National Externalities through Political Markets: The Case of Labour Standards

Can lobbying internalize cross-national externalities? This paper investigates this in a two-country economy where governments regulate labour markets through national labour standards, but are subject to lobbying. We study four different lobbying architectures and show that cross-national externalities are fully internalized in two cases: (i) when governments enter binding international agreements and (ii) when international lobbying is complete. In cases where international lobbying is incomplete, e.g., because of disagreement among lobby groups in different countries or direct bans on lobbying of foreign governments, internalization is also incomplete and a role remains for governments to enter into binding agreements.