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Foreign influence and welfare

Antras, Pol and Padró i Miquel, Gerard (2008) Foreign influence and welfare. NBER working papers, 14129. NBER, Cambridge, USA.

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Abstract

How do foreign interests influence the policy determination process? What are the welfare implications of such foreign influence? In this paper we develop a model of foreign influence and apply it to the study of optimal tariffs. We develop a two-country voting model of electoral competition, where we allow the incumbent party in each country to take costly actions that probabilistically affect the electoral outcome in the other country. We show that policies end up maximizing a weighted sum of domestic and foreign welfare, and we study the determinants of this weight. We show that foreign influence may be welfare-enhancing from the point of view of aggregate world welfare because it helps alleviate externalities arising from cross-border effects of policies. Foreign influence can however prove harmful in the presence of large imbalances in influence power across countries. We apply our model of foreign influence to the study of optimal trade policy. We derive a modified formula for the optimal import tariff and show that a country's import tariff is more distorted whenever the influenced country is small relative to the influencing country and whenever natural trade barriers between the two countries are small.

Item Type: Monograph (Working Paper)
Official URL: http://www.nber.org/papers/w14129
Additional Information: © 2008 by Pol Antràs and Gerard Padró i Miquel.
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior
D - Microeconomics > D7 - Analysis of Collective Decision-Making > D74 - Conflict; Conflict Resolution; Alliances
F - International Economics > F1 - Trade > F11 - Neoclassical Models of Trade
F - International Economics > F5 - International Relations and International Political Economy > F51 - International Conflicts; Negotiations; Sanctions
F - International Economics > F5 - International Relations and International Political Economy > F59 - International Relations and International Political Economy: Other
H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
P - Economic Systems > P1 - Capitalist Systems > P16 - Political Economy
Sets: Departments > Economics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 14129
Date Deposited: 05 Apr 2011 09:42
URL: http://eprints.lse.ac.uk/33871/

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