Author: Patricia Anne Mueller

Publisher:

Published: 2019

Total Pages: 0

ISBN-13:

Chapter 1: I examine the welfare benefit of committing to a trade agreement when a politically-motivated government faces monopolistically competitive firms lobbying for tariff protection against imports. In my model, lobbying is costly to producers: each firm must pay a portion of the industry's upfront-lobby-formation fee as determined by a sequential bargaining game. I show that monopolistically competitive producers under-hire capital to avoid paying a larger share of lobbying costs. As a result, more varieties are produced than is socially optimal, and each firm operates at a higher-than-optimal marginal cost. Commitment to a trade agreement leads to a consolidation of firms in the market and a reduction in the tariff level. I show that a government benefits from committing to a trade agreement (i) on goods with very elastic or very inelastic demand, (ii) when the weight the government places on receiving political contributions from lobbyists is small, and (iii) when producers are strong bargainers and are able to capture the majority of the rents from protection. Chapter 2: In a model in which a small-country government faces domestic political-economy pressure and uncertainty over its terms of trade, a welfare-maximizing government benefits from having access to both rigid and flexible tariff policy options. I show that a welfare-maximizing government may prefer to join both a deep-integration regional trade agreement (helping it commit to free trade with key trading partners, thus correcting production distortions resulting from rent-seeking by politically organized sectors), and a large flexible agreement like the World Trade Organization (providing the flexibility in tariff levels and the institutional structure to pursue temporary tariff protection in response to shocks or unfair trade practices). My paper builds on the framework of Maggi and Rodriguez-Clare (1998), adding uncertainty over world prices and adding the option to join a trade agreement with the flexibility of a temporary escape clause.