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

Author

Listed:
  • Matthew T. Cole

    (Department of Economics, Florida International University)

  • Ben Zissimos

    (Department of Economics, University of Exeter)

Abstract

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.

Suggested Citation

  • Matthew T. Cole & Ben Zissimos, 2014. "Too Small To Protect? The Role of Firm Size in Trade Agreements," Working Papers 1410, Florida International University, Department of Economics.
  • Handle: RePEc:fiu:wpaper:1410
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    File URL: http://economics.fiu.edu/research/working-papers/2014/1410/1410.pdf
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    References listed 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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