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Foreign Influence and Welfare

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Listed author(s):
  • Antras, Pol
  • Padro i Miquel, Gerard

Abstract

How do foreign interests influence the policy determination process? What are the welfare implications of such foreign influence? In this paper we develop a model of foreign influence and apply it to the study of optimal tariffs. We develop a two-country voting model of electoral competition, where we allow the incumbent party in each country to take costly actions that probabilistically affect the electoral outcome in the other country. We show that policies end up maximizing a weighted sum of domestic and foreign welfare, and we study the determinants of this weight. We show that foreign influence may be welfare-enhancing from the point of view of aggregate world welfare because it helps alleviate externalities arising from cross-border effects of policies. Foreign influence can however prove harmful in the presence of large imbalances in influence power across countries. We apply our model of foreign influence to the study of optimal trade policy. We derive a modified formula for the optimal import tariff and show that a country's import tariff is more distorted whenever the influenced country is small relative to the influencing country and whenever natural trade barriers between the two countries are small.

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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3374523.

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Date of creation: 2009
Publication status: Published in Nber Working Paper Series
Handle: RePEc:hrv:faseco:3374523
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Find related papers by JEL classification:
  • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
  • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
  • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
  • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
  • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
  • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
  • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
  • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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  1. Aidt, T.S. & Hwang, U., 2008. "One Cheer for Foreign Lobbying," Cambridge Working Papers in Economics 0860, Faculty of Economics, University of Cambridge.
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  12. repec:ags:afjare:141665 is not listed on IDEAS
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  19. Avinash Dixit & John Londregan, 1998. "Ideology, Tactics, and Efficiency in Redistributive Politics," The Quarterly Journal of Economics, Oxford University Press, vol. 113(2), pages 497-529.
  20. Putnam, Robert D., 1988. "Diplomacy and domestic politics: the logic of two-level games," International Organization, Cambridge University Press, vol. 42(03), pages 427-460, June.
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  23. Toke S. Aidt & Uk Hwang, 2008. "On the Internalization of Cross-National Externalities through Political Markets: The Case of Labour Standards," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 164(3), pages 509-533, September.
  24. Hillman, Arye L & Ursprung, Heinrich W, 1988. "Domestic Politics, Foreign Interests, and International Trade Policy," American Economic Review, American Economic Association, vol. 78(4), pages 719-745, September.
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  26. Ilyana Kuziemko & Eric Werker, 2006. "How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 905-930, October.
  27. Devashish Mitra & Dimitrios D. Thomakos & Mehmet A. Ulubaşoglu, 2002. ""Protection For Sale" In A Developing Country: Democracy Vs. Dictatorship," The Review of Economics and Statistics, MIT Press, vol. 84(3), pages 497-508, August.
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Cited by:

  1. Julia Cage & Lucie Gadenne, 2014. "Tax Revenues, Development, and the Fiscal Cost of Trade Liberalization, 1792-2006," Sciences Po publications info:hdl:2441/4icc4hr7684, Sciences Po.
  2. Kazunobu HAYAKAWA & Nuttawut LAKSANAPANYAKUL & Pisit PUAPAN & Sasatra SUDSAWASD, 2015. "Government Strategy and Support for Regional Trade Agreements: The Case of Thailand," Working Papers DP-2015-37, Economic Research Institute for ASEAN and East Asia (ERIA).
  3. Facundo Albornoz & Esther Hauk, 2010. "Civil War and Foreign Influence," Working Papers 480, Barcelona Graduate School of Economics.
  4. Aidt, Toke S. & Albornoz, Facundo, 2011. "Political regimes and foreign intervention," Journal of Development Economics, Elsevier, vol. 94(2), pages 192-201, March.

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