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

Matthew Cole () and Benjamin Zissimos ()

No 1410, Working Papers from Florida International University, Department of Economics

Abstract: This paper develops a model of a trade agreement that puts at centre stage the competing interests between firms within a sector: Larger firms tend to be pro-trade liberalization whereas smaller firms favor protection. This set-up contrasts with the prior literature in economics that has tended to focus on competing interests between sectors, and further develops a literature in political science. The paper determines the set of circumstances under which a trade agreement will be reached, and the extent of trade liberalization, in an environment where firms can lobby the government for or against a proposed agreement. Lobbying is modelled as an all-pay auction, incorporating the feature that binding contracts over contributions for policies cannot be written. This approach gives rise to the possibility that a trade agreement may not go ahead even if it would increase efficiency. In this set-up, if a proposed agreement is over non-tariff barriers and if it goes ahead then it always entails free trade. On the other hand, if a proposed agreement is over tariffs and if it goes ahead then it either entails free trade or the tariff revenue maximizing tariff.

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: 44 pages
Date: 2014-10
New Economics Papers: this item is included in nep-int
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http://economics.fiu.edu/research/working-papers/2014/1410/1410.pdf First version, 2014 (application/pdf)

Related works:
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 (2015) Downloads
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