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Negotiated Trade Restrictions with Private Political Pressure

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  • Robert C. Feenstra
  • Tracy R. Lewis

Abstract

In this paper we consider a home government with political pressure to restrict trade, at the expense of foreigners. The foreign country is compensated with an income transfer, which can be thought of as a portion of the tariff revenues or quota rents. In this setting the two countries should negotiate over the level of tariff and transfer of rents, depending on the level of political pressure at home. However, if this pressure cannot be directly observed abroad, then the home country may have an incentive to claim arbitrarily high political need and seek corresponding high trade barriers . We resolve this problem by determining incentive compatible trade policies, in which the home government has no incentive to overstate (or understate) the political pressure for protection.

Suggested Citation

  • Robert C. Feenstra & Tracy R. Lewis, 1987. "Negotiated Trade Restrictions with Private Political Pressure," NBER Working Papers 2374, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2374
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    1. Robert C. Feenstra & Jagdish N. Bhagwati, 1982. "Tariff Seeking and the Efficient Tariff," NBER Chapters,in: Import Competition and Response, pages 245-262 National Bureau of Economic Research, Inc.
    2. Wellisz, Stanislaw & Wilson, John D., 1986. "Lobbying and tariff formation: A deadweight loss consideration," Journal of International Economics, Elsevier, vol. 20(3-4), pages 367-375, May.
    3. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    4. Prusa, Thomas J., 1990. "An incentive compatible approach to the transfer pricing problem," Journal of International Economics, Elsevier, vol. 28(1-2), pages 155-172, February.
    5. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-985, December.
    6. Mayer, Wolfgang & Riezman, Raymond G., 1987. "Endogenous choice of trade policy instruments," Journal of International Economics, Elsevier, vol. 23(3-4), pages 377-381, November.
    7. Leslie Young & Stephen P. Magee, 1986. "Endogeneous Protection, Factor Returns and Resource Allocation," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 407-419.
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