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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https://economics.fiu.edu/research/pdfs/2014_working_papers/1410.pdf First version, 2014 (application/pdf)

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