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Too Small To Protect? The Role of Firm Size in Trade Agreements

Matthew Cole () and Benjamin Zissimos ()

No 1501, Working Papers from California Polytechnic State University, Department of Economics

Abstract: This paper develops a new model of a trade agreement that puts at center stage the competing interests between firms within a sector. Larger firms favor trade liberalization whereas smaller firms favor protection. Lobbying by firms for or against the agreement is modelled as an all-pay auction, thus incorporating the feature that binding contracts over contributions for policies cannot be written. A new motive for trade agreement formation is uncovered in this framework whereby governments' incentives to liberalize are driven by the lobbying process. If a proposed agreement is over non-tariff barriers then it always entails free trade. If a proposed agreement is over ariffs then it either entails free trade, which maximizes lobbying revenue, or the tariff revenue maximizing tariff. This outcome is supported by the surprising result that, off the equilibrium path, any tariff agreement that entails lobbying and positive tariffs yields lower expected revenue for the government than a free trade agreement involving no tariff revenue.

Keywords: All-pay auction; firm heterogeneity; non-tariff barriers; tariffs; trade agreement (search for similar items in EconPapers)
JEL-codes: D44 F02 F12 F13 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2015
New Economics Papers: this item is included in nep-bec, nep-cta and nep-int
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https://www.cob.calpoly.edu/economics/wp-content/u ... 019/11/paper1501.pdf First version, 2015 (application/pdf)

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Working Paper: Too Small To Protect? The Role of Firm Size in Trade Agreements (2015) Downloads
Working Paper: Too Small To Protect? The Role of Firm Size in Trade Agreements (2014) Downloads
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