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Foreign influence and welfare

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  • Antràs, Pol
  • Padró i Miquel, Gerard

Abstract

How do foreign interests influence policy? How are trade policies and the viability of trade agreements affected? What are the welfare implications of such foreign influence? In this paper we develop a model of foreign influence and apply it to the study of optimal tariffs. In a two-country voting model of electoral competition, we allow the incumbent party in each country to take costly actions that probabilistically affect the electoral outcome in the other country. We show that policies end up maximizing a weighted sum of domestic and foreign welfare. Using this formulation we show that foreign influence increases aggregate world welfare when there are no other means of alleviating the externalities that arise from cross-border effects of policies. In contrast, when countries can engage in international agreements, foreign influence can prove harmful as powerful countries may refuse to offer concessions. We also show that power imbalances are particularly detrimental to cooperation when they are positively correlated with economic size.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 84 (2011)
Issue (Month): 2 (July)
Pages: 135-148

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Handle: RePEc:eee:inecon:v:84:y:2011:i:2:p:135-148

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Web page: http://www.elsevier.com/locate/inca/505552

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Keywords: Foreign influence Externalities Welfare Electoral competition Balance of power Import tariffs;

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Cited by:
  1. Aidt, Toke S. & Albornoz, Facundo, 2011. "Political regimes and foreign intervention," Journal of Development Economics, Elsevier, vol. 94(2), pages 192-201, March.
  2. Facundo Albornoz & Esther Hauk, 2010. "Civil War and Foreign Influence," UFAE and IAE Working Papers 836.10, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC), revised 19 Dec 2010.

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