Abstract
We develop a model of learning-by-doing in human capital formation in the presence of allocative inefficiencies. The inefficiencies are a result of lobbying by firms to establish, or prevent, barriers to the perfectly competitive allocation of factors of production (labor). It is shown that lobbying may lead to a static welfare loss depending upon the elasticity of substitution between goods, and the relative lobbying power of firms. Further, productivity growth, via learning by doing, changes the relative lobbying power over time. This may magnify or diminish the static welfare loss in the long-run depending on the level of initial misallocation. Therefore, differences in initial lobbying power and rate of productivity growth between sectors determine the long-run effects of lobbying.
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