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Do Countries Free Ride on MFN?

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Author Info
Rodney Ludema (Georgetown University) and Anna Maria Mayda (Georgetown University and CEPR) () (Department of Economics, Georgetown University)

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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 U.S. provides strong support for this relationship. Classification-JEL Codes: F13, D7

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~05-05-13.

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Handle: RePEc:geo:guwopa:gueconwpa~05-05-13

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Keywords: Most-Favored Nation (MFN) clause; free riding; Principal supplier rule;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February. [Downloadable!] (restricted)
  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. Kyle Bagwell & Robert W. Staiger, 2004. "The Economics of the World Trading System," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524341.
  4. Kyle Bagwell & Robert W. Staiger, 2004. "Backward stealing and forward manipulation in the WTO," Discussion Papers 0405-06, Columbia University, Department of Economics. [Downloadable!]
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  5. Saijo, Tatsuyoshi & Yamato, Takehiko, 1999. "A Voluntary Participation Game with a Non-excludable Public Good," Journal of Economic Theory, Elsevier, vol. 84(2), pages 227-242, February. [Downloadable!] (restricted)
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  7. Goldberg, Pinelopi Koujianou & Pavcnik, Nina, 2003. "The Response of the Informal Sector to Trade Liberalization," CEPR Discussion Papers 3874, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Choi, Jay Pil, 1995. "Optimal tariffs and the choice of technology Discriminatory tariffs vs. the 'Most Favored Nation' clause," Journal of International Economics, Elsevier, vol. 38(1-2), pages 143-160, February. [Downloadable!] (restricted)
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  9. Dixit, Avinash & Olson, Mancur, 2000. "Does voluntary participation undermine the Coase Theorem?," Journal of Public Economics, Elsevier, vol. 76(3), pages 309-335, June. [Downloadable!] (restricted)
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  10. Saggi, Kamal, 2004. "Tariffs and the most favored nation clause," Journal of International Economics, Elsevier, vol. 63(2), pages 341-368, July. [Downloadable!] (restricted)
  11. 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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  12. 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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  13. Pinelopi Koujianou Goldberg & Giovanni Maggi, 1999. "Protection for Sale: An Empirical Investigation," American Economic Review, American Economic Association, vol. 89(5), pages 1135-1155, December. [Downloadable!] (restricted)
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  14. repec:att:wimass:192049 is not listed on IDEAS
  15. Andrew K. Rose, 2004. "Do We Really Know That the WTO Increases Trade?," American Economic Review, American Economic Association, vol. 94(1), pages 98-114, March. [Downloadable!]
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  16. Ederington, Josh & McCalman, Phillip, 2003. "Discriminatory tariffs and international negotiations," Journal of International Economics, Elsevier, vol. 61(2), pages 397-424, December. [Downloadable!] (restricted)
  17. Bown, Chad P., 2004. "Trade disputes and the implementation of protection under the GATT: an empirical assessment," Journal of International Economics, Elsevier, vol. 62(2), pages 263-294, March. [Downloadable!] (restricted)
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  19. Leamer, Edward E. & Levinsohn, James, 1995. "International trade theory: The evidence," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394 Elsevier. [Downloadable!] (restricted)
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  20. Bombardini, Matilde, 2008. "Firm heterogeneity and lobby participation," Journal of International Economics, Elsevier, vol. 75(2), pages 329-348, July. [Downloadable!] (restricted)
  21. Lim“o, Nuno, 2002. "Are Preferential trade Agreements with Non-trade Objectives a Stumbling Block for Multilateral Liberalization?," Royal Economic Society Annual Conference 2002 129, Royal Economic Society. [Downloadable!]
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  22. Harry G. Johnson, 1965. "An Economic Theory of Protectionism, Tariff Bargaining, and the Formation of Customs Unions," Journal of Political Economy, University of Chicago Press, vol. 73, pages 256. [Downloadable!] (restricted)
  23. McCalman, Phillip, 2002. "Multi-lateral trade negotiations and the Most Favored Nation clause," Journal of International Economics, Elsevier, vol. 57(1), pages 151-176, June. [Downloadable!] (restricted)
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  1. Limão, Nuno & Tovar, Patricia, 2009. "Policy Choice: Theory and Evidence from Commitment via International Trade Agreements," CEPR Discussion Papers 7137, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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