Do Countries Free Ride on MFN?
The Most-Favored Nation (MFN) clause has long been suspected of creating a free rider problem in multilateral trade negotiations. To address this issue, we model multilateral negotiations as a mechanism design problem with voluntary participation. We show that an optimal mechanism induces only the largest exporters to participate in negotiations over any product, thus providing a rationalization for the Principal supplier rule. We also show that, through this channel, equilibrium tariffs vary according to the Herfindahl-Hirschman index of export shares: higher concentration in a sector reduces free riding and thus causes a lower tariff. Estimation of our model using sector-level tariff data for the U.S. provides strong support for this relationship.
Year of publication: |
2008-06-30
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Authors: | Ludema, Rodney D. ; Mayda, Anna Maria |
Institutions: | Dipartimento di Economia, Management e Metodi Quantitativi (DEMM), Università degli Studi di Milano |
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