Do Countries Free Ride on MFN?

48 Pages Posted: 24 Apr 2009

See all articles by Rodney D. Ludema

Rodney D. Ludema

Georgetown University - Department of Economics

Anna Maria Mayda

Georgetown University - Department of Economics; IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2008

Abstract

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.

Keywords: MFN, Trade negotiations, tariffs

JEL Classification: F13

Suggested Citation

Ludema, Rodney D. and Mayda, Anna Maria, Do Countries Free Ride on MFN? (June 1, 2008). Centro Studi Luca d'Agliano Development Studies Working Paper No. 254, Available at SSRN: https://ssrn.com/abstract=1392742 or http://dx.doi.org/10.2139/ssrn.1392742

Rodney D. Ludema (Contact Author)

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States
202-687-1429 (Phone)
202-687-6102 (Fax)

Anna Maria Mayda

Georgetown University - Department of Economics ( email )

Washington, DC 20057
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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