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Do Countries Free Ride on MFN?

Rodney Ludema and Ann Maria Mayda ()
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Rodney Ludema and Ann Maria Mayda: Department of Economics, Georgetown University, http://www9.georgetown.edu/faculty/ludemar/Home.html

Authors registered in the RePEc Author Service: Rodney D. Ludema () and 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-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: 2008-08-03
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Related works:
Journal Article: Do countries free ride on MFN? (2009) Downloads
Working Paper: Do Countries Free Ride on MFN? (2008) Downloads
Working Paper: Do Countries Free Ride on MFN? (2005) Downloads
Working Paper: Do Countries Free Ride on MFN? (2005) Downloads
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