Foreign Influence and Welfare

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Foreign Influence and Welfare

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Antràs, Pol
Padró i Miquel, Gerard

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6884.

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Date of creation: Jun 2008
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Handle: RePEc:cpr:ceprdp:6884

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances
F11 - International Economics - - Trade - - - Neoclassical Models of Trade
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F51 - International Economics - - International Relations and International Political Economy - - - International Conflicts; Negotiations; Sanctions
F59 - International Economics - - International Relations and International Political Economy - - - Other
P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-07-05 (All new papers)
NEP-INT-2008-07-05 (International Trade)
NEP-POL-2008-07-05 (Positive Political Economics)

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