Current EOPP Research:
Foreign Influence and Welfare
Gerard Padro i-Miquel (with Pol Antràs, Harvard University)
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 although foreign influence is zero in equilibrium, its "threat" may be welfare-enhancing
from the point of view of aggregate world welfare. This is because foreign
influence helps alleviate externalities arising from cross-border effects of policies. The
threat of 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.
Related Paper
Foreign Influence and Welfare
