Do Countries Free Ride on MFN?

Rodney Ludema (Georgetown University) and Anna Maria Mayda (Georgetown University and CEPR) ()
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Rodney Ludema (Georgetown University) and Anna Maria Mayda (Georgetown University and CEPR): Department of Economics, Georgetown University, http://www.georgetown.edu/faculty/ludemar/
Authors registered in the RePEc Author Service: Anna Maria Mayda ()

Working Papers from Georgetown University, Department of Economics

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 U.S. provides strong support for this relationship. Classification-JEL Codes: F13, D7

Keywords: Most-Favored Nation (MFN) clause; free riding; Principal supplier rule (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-reg

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Related works:
Working Paper: Do Countries Free Ride on MFN? (2008)
Working Paper: Do Countries Free Ride on MFN? (2005)
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