This paper conducts a cross-country analysis of the free rider problem associated with the Most-Favored-Nation (MFN) clause in the WTO. We develop a model that relates MFN free riding to the degree of concentration of the exporters and market power of the importers of any product. Specifically, the model predicts that the level of the importer’s tariff resulting from negotiations should be negatively related to the product of exporter concentration, as measured by a Herfindahl-Hirschman index (sum of squared export shares), and the importer’s market power, as measured by the inverse elasticity of export supply, on a product-by-product basis. We test this hypothesis using data on tariffs, trade and production in 81 sectors across 35 WTO countries and find strong support.

bilateral trade

Governance: The European Dimensions ’ (PEGGED) funded by the Socio-

We characterize the optimal tariff bindings in a trade agreement among asymmetric countries that are subject to idiosyncratic political-economy shocks. We find that the optimal tariff binding is decreasing in the relative size of the importing country and its degree of comparative disadvantage. Moreover, under an optimal agreement a smaller country is more likely to apply a tariff that is substantially below its tariff binding. Using applied and bound tariff data from WTO member countries, we …nd strong empirical support for our predictions.