Do Countries Free Ride on MFN?

62 Pages Posted: 18 Aug 2005

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: August 2005

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 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.

Keywords: Most-Favored Nation (MFN) clause, free riding, principal supplier rule

JEL Classification: D70, F13

Suggested Citation

Ludema, Rodney D. and Mayda, Anna Maria, Do Countries Free Ride on MFN? (August 2005). CEPR Discussion Paper No. 5160, Available at SSRN: https://ssrn.com/abstract=785884

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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