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Foreign Influence and Welfare

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  • Antras, Pol
  • Padro i Miquel, Gerard

Abstract

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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File URL: http://dash.harvard.edu/bitstream/handle/1/3374523/antras_welfare.pdf
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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3374523.

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Date of creation: 2009
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Publication status: Published in Nber Working Paper Series
Handle: RePEc:hrv:faseco:3374523

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  1. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 21-92, Tel Aviv.
  2. Guriev, Sergei & Yakovlev, Evgeny & Zhuravskaya, Ekaterina, 2010. "Interest group politics in a federation," Journal of Public Economics, Elsevier, vol. 94(9-10), pages 730-748, October.
  3. Axel Dreher & Nathan Jensen, 2003. "Independent Actor or Agent? An Empirical Analysis of the impact of US interests on IMF Conditions," International Finance 0310004, EconWPA, revised 08 Jan 2004.
  4. Grossman, G.M. & Helpman, E., 1993. "Trade Wars and Trade Talks," Papers 1-93, Tel Aviv.
  5. Conconi, Paola, 2003. "Green lobbies and transboundary pollution in large open economies," Journal of International Economics, Elsevier, vol. 59(2), pages 399-422, March.
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  7. Dixit, Avinash & Grossman, Gene M. & Helpman, Elhanan, 1997. "Common Agency and Coordination: General Theory and Application to Government Policy Making," Scholarly Articles 3450061, Harvard University Department of Economics.
  8. Dollar, David & Alesina, Alberto, 2000. "Who Gives Foreign Aid to Whom and Why?," Scholarly Articles 4553020, Harvard University Department of Economics.
  9. Grossman, Gene M & Helpman, Elhanan, 1996. "Electoral Competition and Special Interest Politics," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 265-86, April.
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  19. repec:ags:afjare:141665 is not listed on IDEAS
  20. Hillman, Arye L & Ursprung, Heinrich W, 1988. "Domestic Politics, Foreign Interests, and International Trade Policy," American Economic Review, American Economic Association, vol. 78(4), pages 719-45, September.
  21. Devashish Mitra & Dimitrios D. Thomakos & Mehmet A. Ulubaşoglu, 2002. ""Protection For Sale" In A Developing Country: Democracy Vs. Dictatorship," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 497-508, August.
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  23. Avinash Dixit & John Londregan, 1998. "Ideology, Tactics, And Efficiency In Redistributive Politics," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 497-529, May.
  24. Aidt, T.S. & Hwang, U., 2008. "One Cheer for Foreign Lobbying," Cambridge Working Papers in Economics 0860, Faculty of Economics, University of Cambridge.
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