How do foreign interests influence the policy determination process? 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. We develop a two-country voting model of electoral competition, where 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, and we study the determinants of this weight. We show that foreign influence may be welfare-enhancing from the point of view of aggregate world welfare because it helps alleviate externalities arising from cross-border effects of policies. Foreign influence can however prove harmful in the presence of large imbalances in influence power across countries. We apply our model of foreign influence to the study of optimal trade policy. We derive a modified formula for the optimal import tariff and show that a country's import tariff is more distorted whenever the influenced country is small relative to the influencing country and whenever natural trade barriers between the two countries are small.
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Find related papers by JEL classification: D62 - Microeconomics - - Welfare Economics - - - Externalities D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances F11 - International Economics - - Trade - - - Neoclassical Models of Trade F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations F51 - International Economics - - International Relations and International Political Economy - - - International Conflicts; Negotiations; Sanctions F59 - International Economics - - International Relations and International Political Economy - - - Other P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
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Christian Broda & Nuno Limão & David Weinstein, 2006.
"Optimal Tariffs: The Evidence,"
NBER Working Papers
12033, National Bureau of Economic Research, Inc.
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Other versions:
Grossman, Gene M & Helpman, Elhanan, 1994.
"Protection for Sale,"
American Economic Review,
American Economic Association, vol. 84(4), pages 833-50, September.
[Downloadable!] (restricted)
Other versions:
Gene M. Grossman & Elhanan Helpman, 1992.
"Protection For Sale,"
NBER Working Papers
4149, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)