Do Countries Free Ride on MFN?

Rodney D Ludema and Anna Maria Mayda ()

No 5160, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 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 US provides strong support for this relationship.

Keywords: free riding; Most-Favoured Nation (MFN) clause; principal supplier rule (search for similar items in EconPapers)
JEL-codes: D70 F13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int
Date: 2005-08
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Working Paper: Do Countries Free Ride on MFN? (2008)
Working Paper: Do Countries Free Ride on MFN?
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