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Optimal Tariffs: The Evidence

  • Broda, Christian
  • Limão, Nuno
  • Weinstein, David E.

The theoretical debate over whether countries can and should set tariffs in response to export elasticities goes back over a century to the writings of Edgeworth (1894) and Bickerdike (1907). Despite the optimal tariff argument's centrality in debates over trade policy, there exists no evidence about whether countries actually apply it when setting tariffs. We estimate disaggregate export elasticities and find evidence that countries that are not members of the World Trade Organization systematically set higher tariffs on goods that are supplied inelastically. The result is robust to the inclusion of political economy variables and a variety of model specifications. Moreover, we find that countries with higher aggregate market power have on average higher tariffs. In short, we find strong evidence in favour of the optimal tariff argument.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5540.

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Date of creation: Mar 2006
Date of revision:
Handle: RePEc:cpr:ceprdp:5540
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  1. Robert W. Staiger & Kyle Bagwell, 1999. "An Economic Theory of GATT," American Economic Review, American Economic Association, vol. 89(1), pages 215-248, March.
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  9. Pinelopi Koujianou Goldbe & Giovanni Maggi, 1997. "Protection for Sale: An Empirical Investigation," NBER Working Papers 5942, National Bureau of Economic Research, Inc.
  10. Alvarez, Fernando & Lucas, Robert Jr., 2007. "General equilibrium analysis of the Eaton-Kortum model of international trade," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1726-1768, September.
  11. Won Chang & Winters, L. Alan, 1999. "How regional blocs affect excluded countries - the price effects of MERCOSUR," Policy Research Working Paper Series 2157, The World Bank.
  12. Allan Drazen & Nuno Limão, 2004. "Government Gains from Self-Restraint: A Bargaining Theory of Inefficient Redistribution," NBER Working Papers 10375, National Bureau of Economic Research, Inc.
  13. Gros, Daniel, 1987. "A note on the optimal tariff, retaliation and the welfare loss from tariff wars in a framework with intra-industry trade," Journal of International Economics, Elsevier, vol. 23(3-4), pages 357-367, November.
  14. Bruce E. Hansen, 2000. "Sample Splitting and Threshold Estimation," Econometrica, Econometric Society, vol. 68(3), pages 575-604, May.
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  16. Markusen, James R & Wigle, Randall M, 1989. "Nash Equilibrium Tariffs for the United States and Canada: The Roles of Country Size, Scale Economies, and Capital Mobility," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 368-86, April.
  17. repec:oup:qjecon:v:121:y:2006:i:2:p:541-585 is not listed on IDEAS
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