Binding overhang and domestic political competition

Governments routinely practice binding overhang by setting applied tariffs below their binding WTO commitments. We explain this phenomenon using a dynamic theory of lobbying. The government is captured by import-competing industries (or exporters), whose applied tariff concessions in response to lobbying threats by exporters (import-competing industries) cause fluctuations in binding overhang. We relate the mean and variance of binding overhang over time to the model's parameters. A stronger lobbying threat induces larger applied tariff concessions, increasing the variance of binding overhang. However, the effect on the mean of binding overhang depends on the direction of tariff concessions and thus on which group has captured the government. The model yields a number of empirically testable predictions and questions the interpretation of some simple empirical exercises.