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Policy Choice: Theory and Evidence from Commitment via International Trade Agreements

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  • Nuno Limão
  • Patricia Tovar

Abstract

Why do governments employ inefficient policies to redistribute income towards special interest groups (SIGs) when more efficient ones are available? To address this puzzle we derive and test predictions for a set of policies where detailed data is available and an efficiency ranking is feasible: tariffs vs. non-tariff barriers (NTBs). In our policy choice model a government bargaining with domestic SIGs can gain by constraining tariffs through international agreements even if this leads to the use of the less efficient NTBs. This generates two key testable predictions (i) there is imperfect policy substitution, i.e. tighter tariff constraints are not fully offset by the higher NTBs they generate and (ii) the decision to commit to constraints depends on the government's bargaining power relative to SIGs. Using detailed data, we confirm that tariff constraints in trade agreements increase the likelihood and restrictiveness of NTBs. We also provide a structural estimate that indicates NTBs are less efficient than the tariffs they imperfectly replace. Moreover, we find parametric and non-parametric evidence that the higher the government bargaining power relative to a SIG the more relaxed the tariff constraint it chooses. This result is stronger for organized industries, which further supports the theory. The main theoretical insights and empirical approach can be applied to other policies to provide additional evidence on inefficient redistribution.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14655.

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Date of creation: Jan 2009
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Publication status: published as Limão, Nuno & Tovar, Patricia, 2011. "Policy choice: Theory and evidence from commitment via international trade agreements," Journal of International Economics, Elsevier, vol. 85(2), pages 186-205.
Handle: RePEc:nbr:nberwo:14655

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Cited by:
  1. Peter Egger & Georg Wamser, 2013. "Effects of the Endogenous Scope of Preferentialism on International Goods Trade," CESifo Working Paper Series, CESifo Group Munich 4208, CESifo Group Munich.
  2. Nuno Limão & Giovanni Maggi, 2013. "Uncertainty and Trade Agreements," NBER Working Papers, National Bureau of Economic Research, Inc 18703, National Bureau of Economic Research, Inc.
  3. Chad P. Bown & Baybars Karacaovali & Patricia Tovar, 2014. "What Do We Know About Preferential Trade Agreements and Temporary Trade Barriers?," Working Papers, University of Hawaii at Manoa, Department of Economics 201418, University of Hawaii at Manoa, Department of Economics.
  4. Mariano Tommasi & Carlos Scartascini & Ernesto H. Stein, 2010. "Veto Players and Policy Trade-Offs: An Intertemporal Approach to Study the Effects of Political Institutions on Policy," IDB Publications, Inter-American Development Bank 6787, Inter-American Development Bank.
  5. Tobias D. Ketterer, 2014. "EU Antidumping and Tariff Cuts: Trade Policy Substitution?," Discussion Papers, University of Nottingham, GEP 2014-05, University of Nottingham, GEP.
  6. Daniel Brou & Michele Ruta, 2012. "A Commitment Theory of Subsidy Agreements," CESifo Working Paper Series, CESifo Group Munich 3945, CESifo Group Munich.
  7. Kyle Handley & Nuno Limão, 2012. "Trade and Investment under Policy Uncertainty: Theory and Firm Evidence," NBER Working Papers, National Bureau of Economic Research, Inc 17790, National Bureau of Economic Research, Inc.
  8. Lawley, Chad, 2013. "Protectionism versus risk in screening for invasive species," Journal of Environmental Economics and Management, Elsevier, Elsevier, vol. 65(3), pages 438-451.
  9. Bown, Chad P., 2014. "Trade policy instruments over time," Policy Research Working Paper Series, The World Bank 6757, The World Bank.
  10. Bown, Chad P., 2013. "Trade policy flexibilities and Turkey : tariffs, antidumping, safeguards, and WTO dispute settlement," Policy Research Working Paper Series, The World Bank 6322, The World Bank.
  11. Paolo E. Giordani & Nadia Rocha & Michele Ruta, 2012. "Food Prices and the Multiplier Effect of Export Policy," CESifo Working Paper Series, CESifo Group Munich 3783, CESifo Group Munich.
  12. Arcand, Jean-Louis & Olarreaga, Marcelo & Zoratto, Laura, 2011. "Weak Governments and Trade Agreements," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8595, C.E.P.R. Discussion Papers.

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