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Do countries free ride on MFN?

  • Ludema, Rodney D.
  • Mayda, Anna Maria

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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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 77 (2009)
Issue (Month): 2 (April)
Pages: 137-150

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Handle: RePEc:eee:inecon:v:77:y:2009:i:2:p:137-150
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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