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The most-favored nation rule in club enlargement negotiation

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Author Info
Edwin L.-C. Lai

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Abstract

We study the effects of the Most-Favored Nation rule in an applicant's negotiation to join a club. When the applicant has to carry out a series of bilateral bargains with the existing members, we find that there are two effects of the MFN rule, viz. the hardened bargainer effect and the free-rider effect. The former effect tends to favor the applicant, while the latter effect tends to hurt the applicant. We find that the free-rider effect is stronger the more asymmetric are the members. The hardened bargainer effect is stronger the larger is the "size of the pie." As the number of members increase, it is more likely that the hardened bargainer effect would dominate.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0815.

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Date of creation: 2008
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Handle: RePEc:fip:feddwp:0815

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Keywords: International trade ; Industrial organization (Economic theory) ; World Trade Organization;

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  1. Henrick Horn & Asher Wolinsky, 1988. "Bilateral Monopolies and Incentives for Merger," RAND Journal of Economics, The RAND Corporation, vol. 19(3), pages 408-419, Autumn. [Downloadable!] (restricted)
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  2. Horn, Henrik & Mavroidis, Petros C., 2001. "Economic and legal aspects of the Most-Favored-Nation clause," European Journal of Political Economy, Elsevier, vol. 17(2), pages 233-279, June. [Downloadable!] (restricted)
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  3. Suh, Sang-Chul & Wen, Quan, 2006. "Multi-agent bilateral bargaining and the Nash bargaining solution," Journal of Mathematical Economics, Elsevier, vol. 42(1), pages 61-73, February. [Downloadable!] (restricted)
  4. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January. [Downloadable!] (restricted)
  5. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September. [Downloadable!] (restricted)
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  6. Eric W. Bond & Stephen Ching & Edwin L.-C. Lai, 2003. "GAME-THEORETIC ANALYSIS OF CHINA's WTO ACCESSION," Pacific Economic Review, Blackwell Publishing, vol. 8(2), pages 117-125, 06. [Downloadable!] (restricted)
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  7. Saggi, Kamal, 2009. "The MFN clause, welfare, and multilateral cooperation between countries of unequal size," Journal of Development Economics, Elsevier, vol. 88(1), pages 132-143, January. [Downloadable!] (restricted)
  8. Krishna, Vijay & Serrano, Roberto, 1996. "Multilateral Bargaining," Review of Economic Studies, Blackwell Publishing, vol. 63(1), pages 61-80, January. [Downloadable!] (restricted)
  9. Chae Suchan & Yang Jeong-Ae, 1994. "An N-Person Pure Bargaining Game," Journal of Economic Theory, Elsevier, vol. 62(1), pages 86-102, February. [Downloadable!] (restricted)
  10. Thomas E. Cooper, 1986. "Most-Favored-Customer Pricing and Tacit Collusion," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 377-388, Autumn. [Downloadable!] (restricted)
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