On the Political Substitutability between Tariffs and Subsidies
AbstractThis paper provides a simple model that highlights the political substitutability between import tariffs and production subsidies.1 When taxes are distortionary, political pressures by domestic interest groups representing the import competing sector induce the government to set inefficiently high tariffs and subsidies. If the government commits the tariff to a lower level - for instance by signing a binding commitment in a trade agreement - interest groups demand (and in the political equilibrium obtain) a larger production subsidy. This political substitutability between tariffs and subsidies is shown to reduce social welfare.
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Bibliographic InfoArticle provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.
Volume (Year): 145 (2009)
Issue (Month): IV (December)
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tariffs; subsidies; lobbying; trade agreements;
Find related papers by JEL classification:
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
- F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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- Daniel Brou & Michele Ruta, 2012.
"A Commitment Theory of Subsidy Agreements,"
CESifo Working Paper Series
3945, CESifo Group Munich.
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