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Do Countries Free Ride on MFN?

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  • Rodney D. Ludema

    ()
    (Georgetown University)

  • Anna Maria Mayda

    ()
    (Georgetown University and Centro Studi Luca d\'Agliano)

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-Hirschman 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 U.S. provides strong support for this relationship.

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Bibliographic Info

Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 254.

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Length: 48
Date of creation: 30 Jun 2008
Date of revision:
Handle: RePEc:csl:devewp:254

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References

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Citations

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Cited by:
  1. Kyle Bagwell & Robert W. Staiger, 2009. "The WTO: Theory and Practice," NBER Working Papers 15445, National Bureau of Economic Research, Inc.
  2. Nuno Limão & Patricia Tovar, 2009. "Policy Choice: Theory and Evidence from Commitment via International Trade Agreements," NBER Working Papers 14655, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. Kyle Bagwell & Robert W. Staiger, 2004. "Backward stealing and forward manipulation in the WTO," Discussion Papers, Columbia University, Department of Economics 0405-06, Columbia University, Department of Economics.
  6. Spearot, Alan C., 2013. "Variable demand elasticities and tariff liberalization," Journal of International Economics, Elsevier, Elsevier, vol. 89(1), pages 26-41.
  7. Rodney Ludema and Ann Maria Mayda, 2008. "Do Countries Free Ride on MFN?," Working Papers, Georgetown University, Department of Economics gueconwpa~08-08-04, Georgetown University, Department of Economics.
  8. Ludema, Rodney D & Mayda, Anna Maria, 2010. "Do terms-of-trade effects matter for trade agreements? Evidence from WTO countries," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7695, C.E.P.R. Discussion Papers.
  9. repec:van:wpaper:13-00002 is not listed on IDEAS
  10. Joanne Gowa & Raymond Hicks, 2012. "The most-favored nation rule in principle and practice: Discrimination in the GATT," The Review of International Organizations, Springer, Springer, vol. 7(3), pages 247-266, September.

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