Foreign Influence and Welfare

Pol Antràs and Gerard Padró i Miquel

No 14129, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How do foreign interests influence the policy determination process? What are the welfare implications of such foreign influence? In this paper we develop a model of foreign influence and apply it to the study of optimal tariffs. We develop a two-country voting model of electoral competition, where we allow the incumbent party in each country to take costly actions that probabilistically affect the electoral outcome in the other country. We show that policies end up maximizing a weighted sum of domestic and foreign welfare, and we study the determinants of this weight. We show that foreign influence may be welfare-enhancing from the point of view of aggregate world welfare because it helps alleviate externalities arising from cross-border effects of policies. Foreign influence can however prove harmful in the presence of large imbalances in influence power across countries. We apply our model of foreign influence to the study of optimal trade policy. We derive a modified formula for the optimal import tariff and show that a country's import tariff is more distorted whenever the influenced country is small relative to the influencing country and whenever natural trade barriers between the two countries are small.

JEL-codes: D72 D74 F11 F13 F51 F59 H23 P16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm, nep-hap and nep-int
Date: 2008-06
Note: ITI POL
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