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

Listed author(s):
  • Matthew T. Cole

    ()

    (Department of Economics, Florida International University)

  • Ben Zissimos

    ()

    (Department of Economics, University of Exeter)

This paper develops a model of a trade agreement that puts at centre stage the competing interests between firms within a sector: Larger firms tend to be pro-trade liberalization whereas smaller firms favor protection. This set-up contrasts with the prior literature in economics that has tended to focus on competing interests between sectors, and further develops a literature in political science. The paper determines the set of circumstances under which a trade agreement will be reached, and the extent of trade liberalization, in an environment where firms can lobby the government for or against a proposed agreement. Lobbying is modelled as an all-pay auction, incorporating the feature that binding contracts over contributions for policies cannot be written. This approach gives rise to the possibility that a trade agreement may not go ahead even if it would increase efficiency. In this set-up, if a proposed agreement is over non-tariff barriers and if it goes ahead then it always entails free trade. On the other hand, if a proposed agreement is over tariffs and if it goes ahead then it either entails free trade or the tariff revenue maximizing tariff.

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File URL: http://economics.fiu.edu/research/working-papers/2014/1410/1410.pdf
File Function: First version, 2014
Download Restriction: no

Paper provided by Florida International University, Department of Economics in its series Working Papers with number 1410.

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Length: 44 pages
Date of creation: Oct 2014
Handle: RePEc:fiu:wpaper:1410
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  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.
  2. Massimo Del Gatto & Gianmarco I. P. Ottaviano & Marcello Pagnini, 2008. "Openness To Trade And Industry Cost Dispersion: Evidence From A Panel Of Italian Firms," Journal of Regional Science, Wiley Blackwell, vol. 48(1), pages 97-129.
  3. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  4. 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.
  5. Barut, Yasar & Kovenock, Dan, 1998. "The symmetric multiple prize all-pay auction with complete information," European Journal of Political Economy, Elsevier, vol. 14(4), pages 627-644, November.
  6. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, vol. 102(1), pages 94-130, February.
  7. Todd R. Kaplan & David Wettstein, 2006. "Caps on Political Lobbying: Comment," American Economic Review, American Economic Association, vol. 96(4), pages 1351-1354, September.
  8. Matthieu Crozet & Pamina Koenig, 2010. "Structural gravity equations with intensive and extensive margins," Canadian Journal of Economics, Canadian Economics Association, vol. 43(1), pages 41-62, February.
  9. 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.
  10. Matthew T. Cole, 2011. "Distorted Trade Barriers," Working Papers 201105, School of Economics, University College Dublin.
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