Do countries free ride on MFN?

Rodney D. Ludema and Anna Maria Mayda

Journal of International Economics, 2009, vol. 77, issue 2, pages 137-150

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.

Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:inecon:v:77:y:2009:i:2:p:137-150

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