Foreign Influence and Welfare

53 Pages Posted: 20 Aug 2008

See all articles by Pol Antras

Pol Antras

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Gerard Padró i Miquel

London School of Economics & Political Science (LSE); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2008

Abstract

How do foreign interests influence the policy determination process? What are the welfare implications of such foreign influence? In this paper we develop a model of foreign influence and apply it to the study of optimal tariffs. We develop a two-country voting model of electoral competition, where we allow the incumbent party in each country to take costly actions that probabilistically affect the electoral outcome in the other country. We show that policies end up maximizing a weighted sum of domestic and foreign welfare, and we study the determinants of this weight. We show that foreign influence may be welfare-enhancing from the point of view of aggregate world welfare because it helps alleviate externalities arising from cross-border effects of policies. Foreign influence can however prove harmful in the presence of large imbalances in influence power across countries. We apply our model of foreign influence to the study of optimal trade policy. We derive a modified formula for the optimal import tariff and show that a country's import tariff is more distorted whenever the influenced country is small relative to the influencing country and whenever natural trade barriers between the two countries are small.

Keywords: balance of powers, electoral competition, externalities, foreign influence, import tariffs, welfare

JEL Classification: D62, D72, D74, F11, F13, F51, F59, P16

Suggested Citation

Antras, Pol and Padro i Miquel, Gerard, Foreign Influence and Welfare (June 2008). CEPR Discussion Paper No. DP6884. Available at SSRN: https://ssrn.com/abstract=1240194

Pol Antras (Contact Author)

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Gerard Padro i Miquel

London School of Economics & Political Science (LSE) ( email )

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United Kingdom

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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