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 |
JEL(s): | D70, F13 |
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.