Policy Choice: Theory and Evidence from Commitment via International Trade Agreements

Abstract

Why do governments employ inefficient policies when more efficient ones are available for the same purpose? We address this puzzle in the context of redistribution towards special interest groups (SIGs) by focusing on a set of important policies: tariffs and non-tariff barriers (NTBs). In our policy choice model a government can gain by committing to constrain tariffs through international agreements even if this leads to the use of less efficient NTBs; commitment has political value because it improves the bargaining position of a government that is weak relative to domestic SIGs. Using detailed data we find support for several of the model’s predictions including: (i) tariff commitments in trade agreements increase the likelihood and restrictiveness of NTBs but not enough to offset the original tariff reductions; (ii) tariff commitments are more likely to be adopted and more stringent when the government is weaker relative to a SIG. Thus, the results explain the use of inefficient policies for redistribution and suggest that the bargaining motive is an important source of the political value of commitment in international agreements. JEL: C7; D7; F13; F5; H2 Contact information: Limao@econ.umd.edu, tovar@brandeis.edu. Limão gratefully acknowledges the research assistance of Antoine Gervais and Shrayes Ramesh as well as the hospitality of the Kiel Institute for World Economy and Yale University (Leitner Program) where part of this research was conducted. We thank Stephanie Aaronson, Chad Bown, Peter Debaere, Allan Drazen, Andrei Levchenko, Horst Raff, Robert Staiger, Alan Sykes and participants at the American Economic Association Meetings, Stanford Law and Economics seminar, the George Washington University Seminar on Regionalism, Kiel University, International Economic Institutions Workshop in Seoul and Brandeis WTO and International Trade Conference for useful comments and discussions. Any remaining errors are ours 1

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Cite this paper

@inproceedings{Limo2009PolicyCT, title={Policy Choice: Theory and Evidence from Commitment via International Trade Agreements}, author={Nuno Lim{\~a}o and Patricia Tovar}, year={2009} }