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Do Countries Free Ride on MFN?

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  • Ludema, Rodney D
  • Mayda, Anna Maria

Abstract

The Most-Favored Nation (MFN) clause has long been suspected of creating a free rider problem in multilateral trade negotiations. To address this issue, we model multilateral negotiations as a mechanism design problem with voluntary participation. We show that an optimal mechanism induces only the largest exporters to participate in negotiations over any product, thus providing a rationalization for the Principal supplier rule. We also show that, through this channel, equilibrium tariffs vary according to the Herfindahl index of export shares: higher concentration in a sector reduces free riding and thus causes a lower tariff. Estimation of our model using sector-level tariff data for the US provides strong support for this relationship.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5160.

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Date of creation: Aug 2005
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Handle: RePEc:cpr:ceprdp:5160

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Keywords: free riding; Most-Favoured Nation (MFN) clause; principal supplier rule;

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References

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Citations

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Cited by:
  1. Kevin x.d. Huang & Engin Volkan & M. ege Yazgan, 2013. "Nonhomothetic Preferences with Habit Formation in Nondurable and Durable Consumption: Implications for Sectoral Comovement," Vanderbilt University Department of Economics Working Papers 13-00002, Vanderbilt University Department of Economics.
  2. Rodney Ludema (Georgetown University) and Anna Maria Mayda (Georgetown University and CEPR), 2005. "Do Countries Free Ride on MFN?," Working Papers gueconwpa~05-05-13, Georgetown University, Department of Economics.
  3. Kamal Saggi & Nuno Limao, 2011. "Size Inequality, Coordination Externalities and International Trade Agreements," Vanderbilt University Department of Economics Working Papers 1115, Vanderbilt University Department of Economics.
  4. Bagwell,K. & Staiger,R.W., 2004. "Backward stealing and forward manipulation in the WTO," Working papers 9, Wisconsin Madison - Social Systems.
  5. Prachi Mishra & Rodney D. Ludema & Anna Maria Mayda, 2010. "Protection for Free? the Political Economy of U.S. Tariff suspensions," IMF Working Papers 10/211, International Monetary Fund.
  6. Spearot, Alan C., 2013. "Variable demand elasticities and tariff liberalization," Journal of International Economics, Elsevier, vol. 89(1), pages 26-41.
  7. Rodney D. Ludema & Anna Maria Mayda, 2010. "Do Terms-of-Trade Effects Matter for Trade Agreements? Evidence from WTO Countries," Development Working Papers 293, Centro Studi Luca d\'Agliano, University of Milano.
  8. Limão, Nuno & Tovar, Patricia, 2011. "Policy choice: Theory and evidence from commitment via international trade agreements," Journal of International Economics, Elsevier, vol. 85(2), pages 186-205.
  9. Joanne Gowa & Raymond Hicks, 2012. "The most-favored nation rule in principle and practice: Discrimination in the GATT," The Review of International Organizations, Springer, vol. 7(3), pages 247-266, September.
  10. Kyle Bagwell & Robert W. Staiger, 2009. "The WTO: Theory and Practice," NBER Working Papers 15445, National Bureau of Economic Research, Inc.

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