DP5160 Do Countries Free Ride on MFN?
|Author(s):||Rodney D Ludema, Anna Maria Mayda|
|Publication Date:||August 2005|
|Keyword(s):||free riding, Most-Favoured Nation (MFN) clause, principal supplier rule|
|Programme Areas:||International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=5160|
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 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 US provides strong support for this relationship.