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.
Rodney Ludema (Georgetown University) and Anna Maria Mayda (Georgetown University and CEPR), .
"Do Countries Free Ride on MFN?,"
Working Papers
gueconwpa~05-05-13, Georgetown University, Department of Economics.
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Find related papers by JEL classification: D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Grossman, Gene M & Helpman, Elhanan, 1994.
"Protection for Sale,"
American Economic Review,
American Economic Association, vol. 84(4), pages 833-50, September.
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Other versions:
Gene M. Grossman & Elhanan Helpman, 1992.
"Protection For Sale,"
NBER Working Papers
4149, National Bureau of Economic Research, Inc.
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