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Too Small To Protect? The Role of Firm Size in Trade Agreements

Author

Listed:
  • Matthew Cole

    (California Polytechnic State University.)

  • Ben Zissimos

    (Department of Economics, University of Exeter)

Abstract

This paper develops a new model of a trade agreement that puts at center stage the competing interests between firms within a sector. Larger firms favor trade liberalization whereas smaller firms favor protection. Lobbying by firms for or against the agreement is modelled as an all-pay auction, thus incorporating the feature that binding contracts over contributions for policies cannot be written. A new motive for trade agreement formation is uncovered in this framework whereby governments’ incentives to liberalize are driven by the lobbying process. If a proposed agreement is over non-tariff barriers then it always entails free trade. If a proposed agreement is over tariffs then it either entails free trade, which maximizes lobbying revenue, or the tariff revenue maximizing tariff. This outcome is supported by the surprising result that, off the equilibrium path, any tariff agreement that entails lobbying and positive tariffs yields lower expected revenue for the government than a free trade agreement involving no tariff revenue.

Suggested Citation

  • Matthew Cole & Ben Zissimos, 2015. "Too Small To Protect? The Role of Firm Size in Trade Agreements," Discussion Papers 1510, University of Exeter, Department of Economics.
  • Handle: RePEc:exe:wpaper:1510
    as

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    File URL: http://people.exeter.ac.uk/RePEc/dpapers/DP1510.pdf
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    References listed on IDEAS

    as
    1. Giovanni Maggi & Andrés Rodríguez-Clare, 2007. "A Political-Economy Theory of Trade Agreements," American Economic Review, American Economic Association, vol. 97(4), pages 1374-1406, September.
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    3. Matthew Cole, 2011. "Not all trade restrictions are created equally," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 147(3), pages 411-427, September.
    4. Todd R. Kaplan & David Wettstein, 2006. "Caps on Political Lobbying: Comment," American Economic Review, American Economic Association, vol. 96(4), pages 1351-1354, September.
    5. Matthieu Crozet & Pamina Koenig, 2010. "Structural gravity equations with intensive and extensive margins," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 43(1), pages 41-62, February.
    6. Kaplan, Todd R. & Luski, Israel & Wettstein, David, 2003. "Innovative activity and sunk cost," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1111-1133, October.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    All-pay auction; firm heterogeneity; non-tariff barriers; tariffs; trade agreement.;
    All these keywords.

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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