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Do Countries Free Ride on MFN?

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Abstract

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.

Suggested Citation

  • Rodney Ludema and Ann Maria Mayda, 2008. "Do Countries Free Ride on MFN?," Working Papers gueconwpa~08-08-04, Georgetown University, Department of Economics.
  • Handle: RePEc:geo:guwopa:gueconwpa~08-08-04
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    JEL classification:

    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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