Working Paper: NBER ID: w2374
Authors: Robert C. Feenstra; Tracy R. Lewis
Abstract: In this paper we consider a home government with political pressure to restrict trade, at the expense of foreigners. The foreign country is compensated with an income transfer, which can be thought of as a portion of the tariff revenues or quota rents. In this setting the two countries should negotiate over the level of tariff and transfer of rents, depending on the level of political pressure at home. However, if this pressure cannot be directly observed abroad, then the home country may have an incentive to claim arbitrarily high political need and seek corresponding high trade barriers . We resolve this problem by determining incentive compatible trade policies, in which the home government has no incentive to overstate (or understate) the political pressure for protection.
Keywords: Trade Policy; Political Economy; International Trade
JEL Codes: F13; F51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political pressure (D72) | Trade restrictions (F14) |
| Home government’s claims about political need (H10) | Negotiation outcomes of tariffs and transfers (F16) |
| Political pressure (D72) | Home government’s claims about political need (H10) |
| Incentive-compatible trade policies (F13) | Home government’s behavior regarding political pressure (D73) |