Discussion paper

DP5160 Do Countries Free Ride on MFN?

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.

£6.00
Citation

Ludema, R and A Mayda (2005), ‘DP5160 Do Countries Free Ride on MFN?‘, CEPR Discussion Paper No. 5160. CEPR Press, Paris & London. https://cepr.org/publications/dp5160