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Do Countries Free Ride on MFN?

  • Rodney D. Ludema

    ()

    (Georgetown University)

  • Anna Maria Mayda

    ()

    (Georgetown University and Centro Studi Luca d\'Agliano)

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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Paper provided by Centro Studi Luca d\'Agliano, University of Milano in its series Development Working Papers with number 254.

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Length: 48
Date of creation: 30 Jun 2008
Date of revision:
Handle: RePEc:csl:devewp:254
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