Policy Choice: Theory and Evidence from Commitment Via International Trade Agreements

56 Pages Posted: 19 Jan 2009 Last revised: 19 Jul 2010

See all articles by Nuno Limão

Nuno Limão

University of Maryland - Department of Economics

Patricia Tovar

Brandeis University - International Business School

Multiple version iconThere are 2 versions of this paper

Date Written: January 2009

Abstract

Why do governments employ inefficient policies to redistribute income towards special interest groups (SIGs) when more efficient ones are available? To address this puzzle we derive and test predictions for a set of policies where detailed data is available and an efficiency ranking is feasible: tariffs vs. non-tariff barriers (NTBs). In our policy choice model a government bargaining with domestic SIGs can gain by constraining tariffs through international agreements even if this leads to the use of the less efficient NTBs. This generates two key testable predictions (i) there is imperfect policy substitution, i.e. tighter tariff constraints are not fully offset by the higher NTBs they generate and (ii) the decision to commit to constraints depends on the government's bargaining power relative to SIGs. Using detailed data, we confirm that tariff constraints in trade agreements increase the likelihood and restrictiveness of NTBs. We also provide a structural estimate that indicates NTBs are less efficient than the tariffs they imperfectly replace. Moreover, we find parametric and non-parametric evidence that the higher the government bargaining power relative to a SIG the more relaxed the tariff constraint it chooses. This result is stronger for organized industries, which further supports the theory. The main theoretical insights and empirical approach can be applied to other policies to provide additional evidence on inefficient redistribution.

Suggested Citation

Limão, Nuno and Tovar, Patricia, Policy Choice: Theory and Evidence from Commitment Via International Trade Agreements (January 2009). NBER Working Paper No. w14655. Available at SSRN: https://ssrn.com/abstract=1329273

Nuno Limão (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-7842 (Phone)
301-405 3542 (Fax)

Patricia Tovar

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

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