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Lobbying and Information Transmission in Customs Unions

Author

Listed:
  • Rafael Lima
  • Humberto Moreira
  • Thierry Verdier

Abstract

This paper studies a customs union agreement when governments are subject to the pressure of special interest groups that have better information about the competitiveness of the industries they represent. We focus on the agreement’s effect on the structure of political influence. When joining a customs union, the structure of political pressure changes and with privately informed lobbies, a new effect emerges: the governments can use the information they learn from the lobby of one country to extract rents from the lobbies of the other country. We call this the “information transmission effect”. This effect enhances the governments’ bargaining power in a customs union and makes lobbies demand less protection. Thus, we find that information transmission increases the welfare of the agreement and decreases tariffs towards non-members. We also investigate the incentives for the creation of a customs union and find that information transmission makes such agreement more likely to be politically sustainable.

Suggested Citation

  • Rafael Lima & Humberto Moreira & Thierry Verdier, 2008. "Lobbying and Information Transmission in Customs Unions," Working Papers 09_01, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
  • Handle: RePEc:fea:wpaper:09_01
    as

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    File URL: ftp://cpq.fearp.usp.br:2300/textos_discussao/eco/wpe09_01.pdf
    File Function: First version, 2008
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    References listed on IDEAS

    as
    1. Martimort, David & Moreira, Humberto Ataíde, 2004. "Common agency with informed principals," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 551, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    2. Ornelas, Emanuel, 2005. "Endogenous free trade agreements and the multilateral trading system," Journal of International Economics, Elsevier, vol. 67(2), pages 471-497, December.
    3. Martin Richardson, 1994. "Why A Free Trade Area? The Tariff Also Rises," Economics and Politics, Wiley Blackwell, vol. 6(1), pages 79-96, March.
    4. Lima, Rafael Costa & Moreira, Humberto, 2014. "Information transmission and inefficient lobbying," Games and Economic Behavior, Elsevier, vol. 86(C), pages 282-307.
    5. Richardson, Martin, 1993. "Endogenous protection and trade diversion," Journal of International Economics, Elsevier, vol. 34(3-4), pages 309-324, May.
    6. David Martimort & Aggey Semenov, 2007. "Political Biases in Lobbying under Asymmetric Information," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 614-623, 04-05.
    7. Emanuel Ornelas, 2005. "Rent Destruction and the Political Viability of Free Trade Agreements," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1475-1506.
    8. Emanuel Ornelas, 2007. "Exchanging market access at the outsiders' expense: the case of customs unions," Canadian Journal of Economics, Canadian Economics Association, vol. 40(1), pages 207-224, February.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    preferential trade agreements; customs union; political economy; lobbying; asymmetric information;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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