On the Political Economy of Free Trade

We consider a general equilibrium model with vertical preferences for one good and two identical countries each having initially one firm. Citizens in each country are asked to vote either for openness or for autarky. Openness means that a foreign firm can sell and produce its product in the domestic country and that the domestic firm can sell and produce its product in the foreign country. The decision to open frontiers is effective only when it is bilateral. Citizens in each country are potentially consumers, workers and shareholders in the domestic firm. They differ with respect to their intensity of preference for quality and their sensitivity to effort. The regime which will prevail between countries corresponds to the majority vote in the low quality country, as we prove that citizens in the high quality country always vote for openness. The outcome thus depends in a complex way on the degree of concentration of the ownership structure in the low quality country and the relative dispersion of the citizens with respect to their intensity of preference for quality and their sensitivity to effort.