Foreign influence and welfare

14 Pages·2011·0.62 MB·English

by  Pol Antràs

JournalofInternationalEconomics84(2011)135–148
ContentslistsavailableatScienceDirect
Journal of International Economics
journal homepage: www.elsevier.com/locate/jie
Foreign influence and welfare☆
Pol Antràsa,⁎, Gerard Padró i Miquelb
aDepartmentofEconomics,HarvardUniversity,Littauer319,Cambridge,MA02138,UnitedStates
bDepartmentofEconomics,LondonSchoolofEconomicsandPoliticalScience,HoughtonStreet,LondonWC2A2AE,UnitedKingdom
a r t i c l e i n f o a b s t r a c t
Articlehistory: How do foreign interests influence policy? How are trade policies and the viability of trade agreements
Received4February2009 affected?Whatarethewelfareimplicationsofsuchforeigninfluence?Inthispaperwedevelopamodelof
Receivedinrevisedform20March2011 foreign influence and apply it tothestudy ofoptimaltariffs. Ina two-countryvoting model of electoral
Accepted21March2011
competition,weallowtheincumbentpartyineachcountrytotakecostlyactionsthatprobabilisticallyaffect
Availableonline2April2011
theelectoraloutcomeintheothercountry.Weshowthatpoliciesendupmaximizingaweightedsumof
JELclassification: domesticandforeignwelfare.Usingthisformulationweshowthatforeigninfluenceincreasesaggregate
worldwelfarewhentherearenoothermeansofalleviatingtheexternalitiesthatarisefromcross-border
D62
D72 effectsofpolicies.Incontrast,whencountriescanengageininternationalagreements,foreigninfluencecan
D78 proveharmfulaspowerfulcountriesmayrefusetoofferconcessions.Wealsoshowthatpowerimbalancesare
F11 particularlydetrimentaltocooperationwhentheyarepositivelycorrelatedwitheconomicsize.
F13 ©2011ElsevierB.V.Allrightsreserved.
F51
F59
Keywords:
Foreigninfluence
Externalities
Welfare
Electoralcompetition
Balanceofpower
Importtariffs
1.Introduction thatconcernthem.Forinstance,governmentsoftentakeactionsthat
canaffecttheimageandpoliticalprospectsofpoliticiansabroadwith
From the enforcement of labor and environmental standards to theaimofalteringfundamentalaspectsofthepoliticalequilibriumin
intellectualpropertyrightsprotection,awidevarietyofgovernment the target country. These influence activities range from the subtle
policies affect neighboring countries. These policy externalities are andcoverttotheobviousandopen,andtheyalsovaryinintensity.A
nowhere more conspicuous than in trade policy, where unilateral typical open channel of influence is the careful use of diplomatic
governmentdecisionsareoftenmadepreciselytotakeadvantageof gestures such as bilateral meetings between political leaders from
theeffecttheyhaveonothercountries.Alargefractionoftheeffortof differentcountries.1Powerfulgovernmentsalsoinfluencethepolitical
international relations practitioners is devoted to mitigating these equilibriuminothercountrieswiththeirallocationofforeignaidorby
externalities. In the case of trade policy, this has prompted the strategically giving contracts to foreign firms (see, for instance,
creationoftheWTOandthesigningofnumeroustradeagreements AlesinaandDollar,2000,andBuenodeMesquitaandSmith,2007).
betweencountries(see,forinstance,BagwellandStaiger,2002). Furthermore, they exert pressure in multilateral organizations to
Historytellsus,however,thatopenbargainingoverpoliciesisfar obtaingooddealsfor“friendly”governmentsinforeigncountries(see
from being the only way governments try to affect foreign policies Dreher and Jensen, 2007). Countries can also resort to more direct
formsofelectoralinfluencethatinvolvetransferstopoliticalagents.
☆ We thank Daron Acemoglu, Jon Eaton, Maitreesh Ghatak, Elhanan Helpman,
TorstenPersson,AndreaPrat,twoanonymousreferees,andseminarparticipantsatthe 1 Forinstance,thePresidentofapowerfulcountrycanimprovetheprofileofa
LSE, NBER, Columbia, Rochester, Stanford, Yale, and Warsaw (ETSG) for helpful foreignpoliticianbyreceivinghimorherinaformalreception.Thisprovidesanimage
comments, and Arnaud Costinot and Giovanni Maggi for particularly insightful ofinternationalrecognitionandcanresultinanimportantdomesticpoliticalboost,
discussionsatthe2008NBERPEand2008AEAMeetings.WearegratefultoEduardo particularly if the foreign leader is in the opposition. Diplomatic scheming in the
Moralesforsuperbresearchassistance. UnitedNationscanalsobeimportant.Whenacountryreceivesascoldingdeclaration
⁎ Correspondingauthor. bythisinternationalbody,itisclearthatthegovernmenthasbeenoutmaneuvered,
E-mailaddress:[email protected](P.Antràs). whichreflectspoorlyonitsabilitytodealwiththeinternationalcommunity.
0022-1996/$–seefrontmatter©2011ElsevierB.V.Allrightsreserved.
doi:10.1016/j.jinteco.2011.03.011
136 P.Antràs,G.PadróiMiquel/JournalofInternationalEconomics84(2011)135–148
Forinstance,theUnitedStatesroutinelyallocatesfundstoorganiza- leadstheHomecountrytopartiallyinternalizeitseffectsonForeign
tionsdedicatedtothepromotionofdemocracyandhumanrights,and welfare,henceimprovinginternationalefficiency.
theseorganizationstendtobealignedwithcertain“friendly”political Second,wheneachcountryisbothinfluencingandbeinginfluenced
parties. Moreover, some governments have allegedly resorted to itispossiblethattheavailabilityofforeigninfluenceraiseswelfarein
directfinancialsupportoftheirpreferredpoliticalpartyinaforeign bothcountries.Whilethisisagainadirectconsequenceoftheexistence
country,andhavealsoprovidedfinancial,logisticordirectassistance ofexternalities,itrequiressomequalification.Inparticular,reciprocal
tocoups.2Theseactionsareusuallydoneinacovertwayastheyare foreign influence leads to Pareto improvements only when the
illegal in most settings, though recent declassifications of official worldwide distribution of influence power is sufficiently “balanced”
documentshaveunveiledtheirwidespreadexistence.3Furthermore, (inasensetobeformalizedinthemodel).Relatively‘weak’countries
there exists evidence that these foreign influence activities have a canbemadeworseoffbyforeigninfluenceinaworldinwhichthereis
significantimpactonthestructureofinternationaltradeflows.4 noothervehicletointernalizecross-borderexternalities.
How do these foreign influence activities shape the policy Thisraisesanaturalquestion.Whatarethewelfareeffectsofforeign
determination process? In particular, how are trade policies and the influence when governments have alternative means of mitigating
viabilityoftradeagreementsaffected?Whatarethewelfareimplica- externalities,suchasthecapacitytosignagreements?Whenwestudy
tionsofsuchforeigninfluence?Inordertoanswerthesequestions,this thisissue,weobtainourthirdmaininsight.Imbalancesofpowercan
paperdevelopsasimplemodelofforeigninfluenceandappliesittothe easilyreduceworldwelfarewhentradeagreementsarealsoavailable
studyofoptimal tariffs.Ourstartingpointisa standardprobabilistic because powerful countries may see their willingness to offerpolicy
voting model of electoral competition, in which political parties concessionsreduced.Thiseffectcanrenderfreetradeinfeasible,and
announcepolicy“platforms”andindividualsvoteforwhicheverparty moregenerallyaffectsthenatureofthesetoffeasibleagreements.In
maximizestheirwelfare.Wemodifythisframeworkintwoways.First, linewiththisintuition,wefindthatpowerimbalancesareparticularly
weconsidertwocountries(HomeandForeign),withpolicyexternal- detrimental to cooperation when they are positively correlated with
ities across their borders. Second, we introduce foreign influence by economicsize.Thisisthecasebothwhenweconsideragreementsthat
endowingtheincumbentgovernmentineachcountrywiththeabilityto areenforceable(viainternationalinstitutionssuchastheWTO),and
takecostlyactionsthatprobabilisticallyaffecttheelectionoutcomein when these agreements need to be self-enforcing (via reputational
theothercountry.Themodelissimpleinthatitabstractsfromspecial mechanisms). Furthermore, in the latter case, we show that when
interestpoliticsandotherelectoraldistortionswithineachcountry,and countriesaresymmetric,evenbalancedincreasesininfluencepower
assumesthatvotershavecommonpreferencesoverthepolicyunder mayreduceworldwelfare.Takentogether,theseresultssuggestthatthe
consideration.Thesesimplifyingassumptionsallowustobetterisolate potentiallybeneficialwelfarepropertiesofforeigninfluencecaneasily
theeffectofforeigninfluenceonpolicydeterminationandwelfare. mutate into negative effects in the presence of other means of
Ourmodeldeliversaverysimpleandintuitive(subgame-perfect) internalizingcross-borderexternalities.
equilibrium.Inparticular,eachcountryimplementspolicieswhichend Ourmodeldepartsfromstandardpolitical-economyframeworks
up maximizing a weighted sum of Home and Foreign welfare. This thatstudythedeterminationofpoliciesastheoutcomeofapolitical
occursbecausethetwopoliticalpartiesinagivencountry(sayHome) gameplayedonlybydomesticagents(politicians,voters,andinterest
tilttheirplatformsinfavoroftheForeigncountryinordertoforestalla groups).6Abranchofthisliteraturehasstudiedtheimplicationsof
potentialForeigninterventioninsupportoftheirdomesticopponent. allowingforinternationalspilloversofsuchpoliciesandhasstressed
Theextenttowhichtheydoso(whichwerefertoasForeign'sinfluence thefactthattheresultingequilibriaareinefficient.7Wecontributeby
power)dependsoncharacteristicsofbothcountries.Inourapplication developingamodelinwhichthereisadirectpoliticaleffectofforeign
totradepolicy,weshowthatasaconsequenceofthepositiveweighton governments. Our work is also related to a small literature that
Foreign's welfare, “optimal” tariffs under foreign influence are still introducesforeignlobbyinginalternativemodelsofpolicymaking.8
proportionaltotheinverseoftheexportsupplyelasticityfacedbya None of the papers in this literature considers government-to-
country,butthelevelofthesetariffsislowerthaninstandardmodels.5 government pressures which is the focus of our analysis. However,
Armed with this simple equilibrium representation result, we some of the welfare results are related. In Gawande et al. (2006)
proceed to examine the welfare consequences of foreign influence. foreignlobbyingcanbewelfareenhancingasitcanbalanceinternal
Ouranalysisbringstolightthefollowingkeyinsights. distortions generated by domestic lobbying. Our welfare results do
First, despite the fact that the tilted policies resulting from not rely on this mechanism as we assume no domestic conflict of
Foreign'sinfluencenecessarilyreduceHomewelfare,wederivevery interest.OurchannelisclosertoConconi(2003)andAidtandHwang
weak conditions under which world welfare is higher with the (2008a,b) in that these authors also push the view that foreign
possibility of Foreign's influence. The reason is that such pressure lobbyingcanfacilitatetheinternalizationofcross-borderexternalities
(asgovernmentpressuresdoinourmodel).Whiletheseauthorsonly
study whether global efficiency is reached or not with foreign
2 Thereareplentyofallegedexamplesoffinancialinvolvement.Forinstance,itis
believedthattheU.S.gavesupporttothe“colorrevolutions”inthenearabroadof lobbying,wecharacterizethefullsetofparametervaluesforwhich
Russiabysupportingdemocraticmovements(Simes,2007).Itisalsowidelybelieved foreign influence can induce Pareto improvements. We view our
thatVenezuela'sPresidentHugoChavezhasusedoilmoneytosupporthispreferred approach more relevant in a world in which utility is not fully
candidatesinseveralLatinAmericancountries(Shifter,2006).Weiner(2007)also
documents thatthe United States gave direct financial support tocertain political
figuresinItaly,JapanandChileamongothercountries. 6 Forthecaseoftradepolicychoicesdistortedbydomesticlobbyingseeforinstance
3 FordescriptionsofU.S.interventionsinforeigncountries,eitherwithfinancial Mageeetal.(1989)orGrossmanandHelpman(1994).
meddlingorbyfomentingcoups,seeKinzerandSchlesinger(1982),Kinzer(2006), 7 Seeforinstancethetwo-countrymodelinGrossmanandHelpman(1995).
andWeiner(2007).ThemostnotoriousU.S.-fomentedcoupsagainstdemocratically 8 HillmanandUrsprung(1988)focusonshowingthatvoluntaryexportrestraints
electedgovernmentsareprobablytheonesinIranin1953,inGuatemalain1954,and (VERs)canberationalizedifforeigninterestsarerepresentedinthedeterminationof
inChilein1973.Theseareextremecasesofinfluencethataresomewhatbeyondthe a country's international trade policy. Gawande et al. (2006) show that foreign
scopeofthemodelwepresent,whichisfocusedondemocraticpolitics. lobbyingcanserveadomesticwelfare-enhancing,counterweightingrolewhenthe
4 Berger et al. (2010) show, for instance, that CIA interventions are typically politicalprocessisdistortedbydomesticlobbieswithintereststhataremisaligned
followed by increases in foreign-country imports from the U.S., without a similar with those of the rest of the electorate. Conconi (2003) studies trade and
increaseinforeign-countryexportstotheU.S. SeeHirschman(1945) foranearly environmentalpolicieswiththepresenceofgreenlobbyistsanddifferentstructures
studyoftheforeigninfluenceactivitiesofNaziGermany. ofinternationalpolicy-making.Inparallelworktoours,AidtandHwang(2008a,b)
5 ThisresultcorrespondstotheempiricalfindingsofBrodaetal.(2008),whofinda showthatforeignlobbyingcanreachworldwelfaremaximizingpoliciesandspecialize
positiveeffectofinverseexportsupplyelasticitiesonimporttariffsbutwithafactorof this result for the case of labor standards. Guriev et al. (2008) provide empirical
proportionalitymuchlowerthanthatimpliedbytheory. evidencesupportingtheinternalizationeffectofmultiregionallobbyinggroups.
P.Antràs,G.PadróiMiquel/JournalofInternationalEconomics84(2011)135–148 137
transferable and countries possess asymmetric levels of political concaveinτHandτF,whichensuresthatthesecond-ordercondition
power.Inanycase,sincebothforeignlobbyingandgovernment-to- oftheprogramswewillstudybelowaremet.10
government pressures exist in the world, we do not view these As is standard in probabilistic voting models, from the point of
channels as mutually exclusive. Rather, the aim of this paper is to viewofvoters,thedifferentcandidatesalsodifferinotherdimensions
characterizetheeffectsofthelatter. that are independent of their policy proposals. In particular, voters
Therestofthepaperisorganizedasfollows.InSection2,wedevelop care about characteristics such as competence, honesty or simply
our two-country model of electoral competition and illustrate how personalappealandcharisma.σjcapturestheadditionalutilitydueto
c
foreigninfluencedistortspolicydetermination.InSection3,wedevelop theseattributesthatavoterincountryjenjoys(orexpectstoenjoyat
anapplicationofourmodeltothestudyofimporttariffchoices.The thetimeofcastingtheballot,sinceσj containsmanyuncertainand
c
welfare implications of foreign influence in non-cooperative and subjectivecomponents)whenpartycisinpower.11
cooperativescenariosarestudiedinSections4and5,respectively.We Definebyσj≡σj−σj thebiasduetonon-policydimensionsthat
I O
offersomeconcludingremarksinSection6. citizensincountryjhaveinfavorofpartyIatthetimeofcastingthe
ballot. Since perceptions can be affected both by deterministic and
2.Amodelofforeigninfluence random elements, we model the bias as σj=−βj+ξj, where ξj is
h i
distributeduniformlyintheinterval − 1 ; 1 .12Itthenfollowsthat
In this section we adapt a well-known framework of campaign 2γj 2γj
theexpectedvalueofthedifferenceσj−σj issimplyequalto−βj.We
contributionsinaprobabilisticvotingsetuptomodelgovernment-to- I O
governmentinfluenceactivities.9Thismodelprovidesamicrofounda- shallthusrefertoβjastheexpectedpro-oppositionbiasincountryj.
tion for the reduced form effect of influence on welfare that we To introduce foreign influence in a simple way, we assume that
incumbents can take costly actions ej that aim to manipulate the
analyzeindetailinsubsequentsections.
electoral results in the foreign country. Following the literature on
specialinterestpolitics,weassumethatthisinfluenceejcanaffectthe
2.1.Environmentandpoliticalstructure
opinion that voters have of theircandidates in the foreigncountry,
σ−j.13Tolinkσ−jtotheactionsofthegovernmentincountryj,we
Consideraworldwithtwocountries,Home(H)andForeign(F).In
simplyassumethatβj=ej,sothat
eachcountryelectoralcompetitiondeterminescertaindimensionsof
economic policy, τH and τF. These policies generate international
externalitiesinthatthecitizensofcountryHareaffectedbyτF,and σ−j=−β−j+ξ−j=−ej+ξ−j:
viceversa.Anaturalexampleofsuchpoliciesistariffsonimports,but
the framework can accommodate other externalities such as In short, we assume that the actions taken by the foreign
environmental policy. In each countrythere is an election between governmentaffecttheexpectedpro-oppositionbiasathomeoneto
two candidates, the incumbent (I) and the opposition (O), and one. Hence, our specification is such that in the absence of foreign
domestic voters elect whichever politician offers them a higher influence, the expected bias would be 0.14 We let ej take either
indirectutility.Theincumbentineachcountrycantakeactionsthat positive or negative values, so foreign influence can be aimed at
aim at manipulating electoral results in the foreign country. These discreditingorendorsingtheincumbentparty.
costlyactionscanrangefromthedisseminationofmessagesaimedat
discrediting or extolling the incumbent party, to the provision of 2.1.2.Politicians,platforms,andtiming
funds and logistical help to opposition or incumbent groups or the Beforetheelectionsineachcountryj∈{H,F},eachoftheparties
applicationof diplomaticpressure on the incumbent. Theagents in c∈{I,O}crediblycommitstoaplatformorpolicyτjtobeimplemented
c
themodelthusare(i)HomeandForeignpoliticians(twopartiesin shouldthatpartywintheelection.Partieschooseτj fromacompact
c
eachcountry),and(ii)HomeandForeignvoters. subsetoftherealline,i.e.τj∈Ψ=[τ ,τ ].Wewillfocusthroughout
c min max
onthecaseinwhichequilibriumpolicieslieintheinteriorofΨ.15
2.1.1.Voters,externalities,andinfluence Weassumethatpoliticiansarepartiallyself-interested.Ontheone
Each country is populated by a unit measure of individuals. If hand, they care about their election prospects, as captured by the
candidatec∈{I,O}incountryj∈{H,F}winstheelection,acitizenin probability of theirown partyc winning theelection. On theother
countryjobtainsutility hand, politicians independently care about the welfare of their
(cid:1) (cid:3) (cid:1) (cid:3) citizens. As a consequence, their preferences also depend on the
Vj τj;τ−j;σj =vj τj;τ−j +σj: ð1Þ
c c c c
10 Globalconcavityissufficientbutnotnecessaryforthesecond-orderconditionsto
In this expression, vj(τj, τ−j) captures the indirect utility that a besatisfied.ThewelfarefunctionsinourparametricexampleinSection3arenot
c globallyconcaveinτHandτF,andyetthesecond-orderconditionsarestillmet.
voterincountryjderivesfromthepoliciesimplementedathomeby 11 Notethatinthismodel,thereisnodifferenceinthewayvotersincountryjvalue
candidatec,τcj,andfromthepoliciesoftheforeigncountrythataffect eachcandidacy,aspreferencesareidentical.Ourassumptionsthereforeensurethat,
her well-being, τ−j. The dependence of vj(⋅) on the foreign policy conditionalonτ−j,thereisasinglepolicyτjthateveryvoteriinjprefers.Asweare
couldbepositive,thusreflectingapositiveexternalityoftheforeign interestedintheeffectsofforeign influence, weendowthecountry withinternal
policy on domestic welfare, or negative, thus reflecting a negative consensusontheconditionallypreferredpolicyτj.Hence,anydeparturefromthat
preferredpolicymustbeduetointernationalpoliticalfactors.
externalityoftheforeignpolicyondomesticwelfare.Forsimplicity, 12 Inassumingauniformdistribution,wefollowthebulkoftheprobabilisticvoting
we shall consider situations with symmetric spillover effects, in the literature.Thisdistributionalassumptionensurestheexistenceofanequilibriumand
sense that either ∂vH/∂τFN0 and ∂vF/∂τHN0, or ∂vH/∂τFb0 and ∂vF/ considerablysimplifiestheanalysis.
∂τHb0.Fornow,wealsoassumethatthefunctionvj(τH,τF)isglobally 13 Inmodelingforeigninfluence,webuildontheworkonspecialinterestgroupsby
Baron (1994) and Grossman and Helpman (1996). In particular, we follow this
literatureandassumethatthevalueofσjcanbeaffectedbyactionstakenbythird
9 SeePerssonandTabellini(2000)foratextbooktreatmentoftheLindbeckand agents.Wehereassumethattheseagentsareforeigngovernmentsasopposedto
Weibull(1987)classicframework.Sections3.5and7.4covermodelsclosesttotheone domesticlobbies.
proposedhere.DixitandLondregan(1995,1998)useavariantofthismodeltodiscuss 14 Wemakethisassumptiontoisolatetheroleofforeigninfluenceinshapingthe
redistributivepoliticswhenvotersbelongtogroupswithdifferentpoliticalsensitivity. announcedpoliciesofeachcountry.
Grossman and Helpman (1996) introduce special interest group activities such as 15 This is ensured if γj is small enough. Allowing for corner solutions would be
campaign contributions in this framework. None of these papers extend this straightforward, though it would complicate the algebra while not generating
frameworktoexplicitlyconsiderinternationalpolitics. additionalinsights.
138 P.Antràs,G.PadróiMiquel/JournalofInternationalEconomics84(2011)135–148
enacted policy decisions. In particular, we assume that the prefer- Proposition1. Thereexistsaconvergentpoliticalequilibriuminwhich
encesofpartyc=I,Oincountryjcanbesummarizedby: the two political parties in each country j=H, F announcea common
policyτˆj and this policy maximizes a weighted sum of domestic and
8 (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3) foreignwelfare,i.e.,
Wcj =><>:ααjjPPcjj ++(cid:1)11−−ααjj(cid:3)υυjj(cid:1)ττHwH;;ττFwF(cid:3)−12 ej=ϕj 2; iiffcc==OI; ð2Þ ∂vj(cid:1)τˆj;τˆk(cid:3) +μk;j⋅∂vk(cid:1)τˆj;τˆk(cid:3) =0:
c w w ∂τˆj ∂τˆj
wherePjistheprobabilityofpartycwinningtheelectionincountryj, Furthermore,theweightμk,jonforeignwelfareisgivenby
c
vj(τj, τ−j) is the indirect utility associated with the implemented (cid:1) (cid:3) (cid:1) (cid:3)
policies in H and F, and αj measures the degree of self-interest of αj 1−αk ϕk γj 2
politicians(whichforsimplicityweassumeindependentofpolitical μk;j= αjγj+ 1(cid:4)1−αj(cid:5) ; ð3Þ
affiliation).Onecanalsointerpret1−αjasaninstitutionalparameter 2
measuring the extent to which there are constraints on politicians andisincreasinginαj,ϕkandγj,anddecreasinginαk.
thatforcethemtotakeint(cid:4)oacco(cid:5)untthepublicinterest(e.g.strength Tounderstandthisresult,recallthetimestructureofthegame.Inthe
ofcivilsociety).16Finally,12 ej=ϕj 2capturesthecosttotheincumbent firststagepartiesannounceandcommittoapolicyplatform.Theyknow,
incountryjofexertinginfluenceej,wherealargeϕjreflectsthatcountry
however, that in the second stage, foreign incumbents will exert
jisrelativelyefficientatinflictinginternationalpressure. influenceinfavorofthedomesticpartythatannouncesapolicymost
Asnotedabove,σjincludesvotersperceptionsonthecompetence,
favorable to the foreign constituents. The larger is the difference in
charisma and moral fiber of candidates, and such perceptions can
policies between parties, the larger is this foreign intervention, since
change dramatically due to last-minute revelations on candidate's
moreisatstakefortheforeigncountry.Asaconsequence,partiesfeel
characteristics (such as performances in head-to-head debates, or
obligatedtotilttheirpoliciesinfavoroftheforeigncountry.However,
corruption accusations) or to the effect of shocks to the political
such tilting implies reducing the utility of their domestic voters. The
environment such as a show of incompetence dealing with an
equilibriumpolicyissuchthatitbalancesthetrade-offbetweendomestic
environmental disaster or foreign policy crisis. Hence, in keeping utilityandthethreatofforeigninfluence.Sincebothpartiesfacethesame
with the literature, we assume that the particular values σIj and σOj trade-off,theyendupannouncingthesamepolicy,τˆj =τˆj.Thereforeit
(and therefore σj) are unknown to politicians at the time they c
follows that in equilibrium the incumbent government in the other
announce(andcommitto)theirplatforms.
countryisactuallyindifferentastowhichpoliticalpartywinstheelection
Tosummarize,thetimingofeventsinthemodelisasfollows: inthatcountry.Asaresult,theequilibriumamountofforeigninfluence
• (t=1) The incumbent and opposition parties in each country j eˆ−jiszero.Nonetheless,thepossibilityorthreatofforeigninfluenceaffects
announceapolicyplatformτj,c=I,O. theequilibriumannouncedpoliciesinasignificantmanner:μk,jisthe
c
• (t=2) Each country j's incumbent government simultaneously weightthatforeignwelfarereceivesinthedomesticpolicyprocessand
decideshowmucheffortejtoexertwiththegoalofaffectingthe this is entirely as a consequence of the possibility to exercise foreign
electoraloutcomeincountryk≠j. influence.19
• (t=3)ThevaluesofξHandξFarerealized. Theextenttowhichpoliticalpartiesincountryjtilttheirpoliciesis
• (t=4)Electionsoccurineachcountry,policiesannouncedatt=1 increasinginγjandϕk,anddecreasinginαk.Thesevariablesaffectthe
bythewinnersareimplementedandpayoffsarerealized. propensityofforeigncountriestoexertinfluencebyreducingthecost
(ϕk),increasingtheelectoralimpact(γj)andincreasingthebenefitsto
2.2.Equilibrium:arepresentationresult thepolitician(αk).Inaddition,thistiltingisincreasinginthe“political
ambition”inthereceivingcountry(αj)becauseambitiouscandidates
Wenowseektocharacterizeasubgameperfectequilibriumofthe givegreaterimportancetowinningelectionsthantothewelfareoftheir
abovepoliticalgame,inwhichallpoliticalpartieschooseaplatformτj constituents.Hence,theyaremorewillingtosacrificethelattertoavoid
c
tomaximizetheirutilityinEq.(2),eachincumbentpartychoosesan foreigninfluencethatcoulddiminishtheirelectoralprospects.
influencelevelejtoagainmaximizeEq.(2),andindividualsvotefor Finally,notethatcountryj'spoliciesarerelativelymoredistorted
thepoliticalpartyintheircountrythatmaximizestheirutilityinEq. whenevertheeffectofcount(cid:1)ryj's(cid:3)policiesoncountryk'swelfareis
(1). Despite the multiple moving parts of the model, there always larger (as measured by ∂vk τˆj;τˆk =∂τˆj). Hence, for policies that
existsanequilibriumthathasanextremelyintuitivestructure.17In generateno cross-border externality, the existenceof the influence
this equilibriumthe two political parties in each country announce channelmakesnodifference.
the same platform, τj=τj =τj. We call this equilibrium convergent We have generated this weighted average representation result
I O
equilibrium.18Wedescribeitinthefollowingresult,whichisproven out of a model based on influence over electoral results, in the
inAppendixA. tradition of Baron (1994) and Grossman and Helpman (1996).
However,theliteratureonspecialinterestpoliticshasalsoproduced
aclassicframeworkinwhichtransfersfromspecialintereststothe
policy-maker are designed to directly buy favorable policies, as in
16 The preference formulation in Eq. (2) is also consistent with the following
interpretation: politicians are entirely self interested. However, as they are also Grossman and Helpman (1994) and Dixit, Grossman and Helpman
citizens,theycareabouttheeffectthatenactedpolicieshaveonthemselves.Inthis (1997). This framework also generates equilibrium policies that
case,αjmeasurestherelativeweightoftherentsassociatedwithholdingoffice.Our maximize weighted averages of welfare functions, and it would be
resultswouldbeessentiallyidenticalifpoliticiansplacedaweight1−αjonsocial straightforward to adapt it to the foreign influence that we are
welfareundertheirannouncedpolicyratherthanunderthatofthewinningparty:i.e.,
Wcj=αjPcj+(1−αj)vj(τcj,τ−j).
17 Wefocusonthisequilibriumbecauseitprovidesasimpleandintuitivereduced 19 Somereadersmightquestiontheappealofamodelofforeigninfluenceinwhich
form and because it is analogous to the familiar results from the special interest theseinfluenceactivitiesarezeroinequilibrium.Itwouldhoweverbestraightforward
politicsliterature. to modify our model in order to generate positive foreign influence along the
18 Dependingontheshapeofthefunctions v(⋅),thegamemayalsoadmitnon- equilibrium path. This could be achieved, for instance, by introducing uncertainty,
convergentequilibriainwhichthetwopartiesineachofthetwocountriesannounce incomplete information or differences in ideology between political parties. We
differentpolicies.Weleavethemuchmorecumbersomestudyoftheseequilibriafor believethatoursimplerformulationservesausefulroleinillustratingthatthemere
futureresearch. possibilityofforeigninfluencecanhaveimportanteffects.
P.Antràs,G.PadróiMiquel/JournalofInternationalEconomics84(2011)135–148 139
interestedin,andtoobtainanidenticalrepresentationresult.Hence, incountryj,Sj(p)denotesconsumersurplus,andpisthevectorof
theworldwelfareimplicationsthatwederiveinthenextsectionsare domesticpricesp≡(1,pj,pj).Givenourassumptions,wecanfurther
1 2
associated with a variety of specific channels of government-to- write aggregate income in country j as Ij=1+Πj(pj)+Πj(pj)+
1 1 2 2
governmentinfluence.20 Rj(τ, pW), where
8(cid:1) (cid:3) (cid:1) (cid:1) (cid:3) (cid:1) (cid:3)(cid:3)
3.Anapplicationtotradepolicy (cid:4) (cid:5) >< τH2−1 pW2 cH2 pH2 −yH2 pH2 if j=H
Rj τ;pw = (cid:1) (cid:3) (cid:1) (cid:1) (cid:3) (cid:1) (cid:3)(cid:3)
We next illustrate the implications of our model of foreign >: τF1−1 pW1 cF1 pF1 −yF1 pF1 if j=F
influencebydevelopinganapplicationwherethepoliciesτHandτF
areimporttariffs.Thegeneral-equilibriummodelwedescribebelow istariffrevenueincountryj.Notealsothatconsumersurplusissimply
willprovideaneconomicfoundationfortheabstractindirectutility givenbySj(p)=∑2 [uj(cj(pj))−pjcj(pj)].
i=1 i i i i i i
functionvj(τH,τF)usedabove,andintermsoftheterminologyused Givenquasilinearpreferences,wecanstudytradepolicysectorby
above,itwillfeaturenegativepolicyexternalities.Furthermore,our sector.Wecanfocusontheproblemofasinglecountrysettingtariffs
assumptions will imply that vj(τH, τF) will be separable in its onthegoodthatisanaturalimportforthatcountry.Indoingso,itis
arguments,whichwillgreatlysimplifytheanalysis. importanttorememberthattheworldpricepWisendogenousand
i
Theroleoftheapplicationistostudytheeffectofforeigninfluence mustsatisfymarketclearing,or
onpolicydeterminationandwelfare.Wewillfirstconsidersituationsin (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3)
whichcountriesbehavenon-cooperatively(“tradewars”),andlaterwe Mj pj ≡cj pj −yj pj =y−j pW −c−j pW ≡X−j pW forj≠−j:
will analyze how foreign influence shapes the characteristics and i i i i i i i i i i i i
feasibilityofinternationalagreements(“tradetalks”).Althoughsomeof ð5Þ
theresultswillbespecifictotheapplicationunderstudy,otherresults
continue to hold in general setups with potentially positive policy
externalities(e.g.,environmentalpolicy)andnonseparabilitiesinthe 3.2.Alinearexample
functionvj(τH,τF).Wereferthereadertoourworkingpaperversion
(AntràsandPadróiMiquel,2008)fordetailsonthesegeneralresults. Althoughourmodeldeliversageneralformulaforoptimaltariffs
that naturally generalizes the standard one obtained under social
3.1.Economicmodel welfaremaximization,wewillforthemostpartfocusonderivingour
resultsinawidelyusedparametricexamplewithlineardemandand
Consideraworldconsistingoftwocountries:HomeandForeign. supplyfunction(c.f.,BondandPark,2002,MaggiandRodriguez-Clare,
Each country is populated by a continuum of measure one of 2007). More specifically, we assume that the utility functions uij in
individualswithidenticalpreferences: Eq.(4)arequadratic,sothatdemandfunctionsarelinearandgivenby
(cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3)
uj=cj + ∑2 uj(cid:1)cj(cid:3); j=H;F ð4Þ cHi pHi =λ αHi −βpHi ; cFi pFi =αFi−βpFi;fori=1;2; ð6Þ
0 i i
i=1
where αH=αF=α Nα =αH=αF. Furthermore,the rent functions
2 1 L S 1 2
where uj(⋅) is increasing and strictly concave. All individuals Πij are also assumed to be quadratic, thus leading to linear supply
i functionsineachcountry:22
inelasticallysupplyoneunitoflabor.Good0servesasthenumeraire,
iscostlesslytradedandnotsubjecttotariffs.Itsworldanddomestic (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3)
price is normalized to 1. It is produced one to one with labor yHi pHi =λ a+bpHi ; yFi pFi =a+bpFi;fori=1;2: ð7Þ
everywhereintheworld,whichpinsdownthewagerateto1inall
countries.Theothergoodscanalsobetradedinternationally,butmay Noticethatbothcountriessharesimilardemandandsupplyfunctions,
be subject to import tariffs. We shall also assume that good 1 is a butHomedemandisdisproportionatelylargeinsector2,whileForeign
“natural export” of Home, while good 2 is a “natural export” of demand isdisproportionately large in sector 1. As a result, Home is a
Foreign.21Moreprecisely,weassumethattradepolicyand“foreign naturalimporterinsector2,whileForeignisanaturalimporterinsector1.
influence” cannot revert “natural” comparative advantage patterns. Inorderforequilibriumautarkypricestobepositive,weneedtoassume
Ourparametricexamplebelowwillfeaturethisproperty. thatα Nα Na.Notethattheparameterλcapturestherelativesizeofthe
L S
Forsimplicity,wewillfocusonaworldinwhichcountriesonlytax HomecountryrelativetotheForeigncountry.Tobuildintuition,wewill
theirimports.Asiswell-known,countriesmayfinditoptimaltouse howeverstudyatseveraltimesthecaseλ=1,inwhichcountriesarefully
importtariffstoshiftthetermsoftradeintheirfavor.LetpiWdenote symmetricexceptfortheirstrengthofforeigninfluence.
theworlduntaxedpriceofgoodi.Thiscorrespondstothepricepaid
byconsumersintheexportingcountry,sincetherearenotaxesnor 4.Foreigninfluenceandtradewars
transportcostsinvolvedinthattransaction.Ontheotherhand,the
domesticpriceintheimportingcountryjwillbegivenbyτijpiW,where Havingdescribedthestructureof oureconomicmodel,wenext
τij−1denotesthe(percentage)importtariff(tobederivedbelow). returntothepoliticalgameinSection2.Ourfirstgoalistostudythe
Non-numeraire goods are produced combining labor and sector- effect of foreign influence on policy determination and welfare in
specificcapitalaccordingtoconstantreturnstoscaletechnology.LetΠijbe situationsinwhichcountrieschoosetheirpoliciesnon-cooperatively
theaggregaterentaccruingtosectorispecificfactorincountryj.Capitalis asdictatedbyourrepresentationresultinProposition1.Inlightof
evenlydistributedamongthemeasure1ofworkersineachcountry. that result, and ignoring irrelevant terms, we can write the Home
A convenient property of the quasilinear representation of governmentproblemas:
preferences in Eq. (4) is that aggregate welfare in country j can be
(cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:1) (cid:3) (cid:1) (cid:3)(cid:3) (cid:1) (cid:1) (cid:3)(cid:3) (cid:1) (cid:3)
writtenasvj(p)=Ij(p)+Sj(p),whereIj(p)denotesaggregateincome maxΠH pH + τH−1 pW cH pH −yH pH +uH cH pH −pHcH pH
τH 2 2h (cid:1) (cid:3) 2(cid:1) (cid:1)2 2(cid:3)(cid:3) 2 2(cid:1) (cid:3)i 2 2 2 2 2 2
20 Nevertheless, it should be noted that because this alternative model tends to +μF;H ΠF2 pW2 +uF2 cF2 pW2 −pW2cF2 pW2 ;
featurepositiveinfluencelevelsinequilibrium,theimplicationsofforeigninfluence
foreachcountry'swelfarewouldnotbeidenticaltothoseinourframework.
21 WecouldeasilyextendtheanalysistothecaseofNN2goods. 22 RememberthatbyHotelling'slemma,wehavethatΠij′(pij)=yij.
140 P.Antràs,G.PadróiMiquel/JournalofInternationalEconomics84(2011)135–148
subject to pH=τHpW and cH(pH)−yH(pH)=yF(pW)−cF(pW). This the response of the level of tariffs to increases in the influence of
2 2 2 2 2 2 2 i 2 i
programdeliversthefollowinggeneralsolution foreigncountries.26
(cid:1) (cid:3) We next turn to a study of the local (country-level) and global
τˆH−1=(cid:1)1−μF;H(cid:3)1≡(cid:1)1−μF;H(cid:3) X2F p(cid:4)W2 (cid:5): ð8Þ (ewquoirllidbr-iluevmelt)awriefflsfairneecaocnhsecqouuenntcryes'sowffeolrfaerigenfuinnflctuieonncaen.Pdludgifgfienrgenthtie-
ξF2 pW2 X2F′ pW2 ating,itisstraightforward(thoughsomewhattedious)toverifythat
(seeAppendixAfordetails):
Note that when μF,H=0, the Foreign country does not exert any
influenceatHome,andnaturallyweobtainthestandardoptimaltariff Proposition3. Inthenon-cooperativeequilibriumwithforeigninfluence:
formula:Home'simporttariffisequaltotheinverseoftheexportsupply (cid:1) (cid:3)
elasticityitfaces.Conversely,whenμF,H=1,Foreign'sinfluenceisso 1. thewelfarelevelvj τˆH;τˆF ofcitizensincountryjisincreasinginthe
powerfulthatitprecludesanyterms-of-trademanipulationonthepart influence power μj,k of her country and decreasing in the influence
oftheHomecountry.Insuchacase,wehavethatForeign'sinfluence poweroftheothercountryk≠j.
leadstofreetradeinsector2.Thisisnotsurprisingbecause,insucha 2. worldwelfare is increasing in the influence power of any country j
case,theHomecountrywouldbechoosingτHtomaximizeaggregate wheneverμj,kb1andisdecreasinginthisinfluencepowerforμj,kN1.
worldwelfare,andthisisachievedwithfreetrade.23
In the intermediate cases in which μF,H∈(0, 1), we have that Part1ofProposition3givestheimpressionthatforeigninfluence
Home'soptimaltariffisstillpositivebutlowerthantheoptimalone behaveslikeazero-sumgame.Anincreaseinthepowerofacountryis
whenμF,H=0.24Thisiseasilyverifiedinourlinearexample,inwhich goodforthatcountryandbadforitsneighbors.Thisexplainswhyin
Home'soptimaltariffisgivenby(seeAppendixAfordetails): most countries, most channels of foreign influence are illegal:
(cid:1) (cid:3) countries would like to be completely insulated from foreign
1−μF;H ðα −α Þ influence,whileatthesametimewouldlikefreereigntoinfluence
τˆH−1= ðα −aÞ+ðα −aÞ(cid:4)L1 +S1−μF;H(cid:5); ð9Þ theirneighbors.However,part2showsthatforeigninfluencepower,
L S λ as long as it is not unreasonably high, will normally generate an
increase in aggregate world welfare due to the internalization of
Followinganalogoussteps,wehavethatForeign'soptimaltariffin
externalities.
sector1isgivenby
Thissecondpointgeneratesaninterestingpossibility:isitpossible
(cid:1) (cid:3) to find power configurations (μH,F, μF,H) that provide a Pareto
τˆF−1= 1−μH;F ðα(cid:4)L−αSÞ (cid:5): ð10Þ improvement with respect to the case with no foreign influence
ðα −aÞ+ðα −aÞ λ+1−μH;F whatsoever?Proposition3examineschangesinasinglecomponent
L S ofthepowerconfigurationvector,buttoaddressthisquestionweare
interestedinexploringhowthewelfarelevelsofbothcountriesare
Straightforwarddifferentiationthendelivers: affected by general changes in power configurations. This is
Proposition2. Inthepresenceofforeigninfluence,eachcountry'stariff graphicallyillustratedinFigs.1and2.
isdecreasingintheinfluencepoweroftheothercountry(∂τˆj=∂μk;jb0). ThetwocurvesineachgraphrepresentthecombinationsofμH,F
Furthermore,thereductionintariff(cid:4)sisincre(cid:5)asinginthe(cid:4)relative(cid:5)sizeof and μF,H — with (μH,F, μF,H)∈[0, 1]×[0, 1] — that leave Home and
theinfluencedcountry(i.e.,∂2τˆH= ∂μF;H∂λ b0,∂2τˆF= ∂μH;F∂λ N0). Foreign indifferent between a world with foreign influence and a
worldwithoutforeigninfluence(i.e.,μH,F=μF,H=0).InAppendixA,
Thefirstresultisintuitiveandcanbeshowntoholdinmuchmore weshowthattheseschedulesareonlyafunctionofμH,F,μF,H,andλ,
general setups than the one under study (see our working paper andthustheyareeasilyplottednumericallyinthespace(μH,F,μF,H).
version).Inparticular,giventhattheHomeimporttariffgeneratesa Thefactthatthesecurvesareupwardslopingfollowsfrompart1of
negative externality in Foreign, it is natural that an increase in Proposition3.Finally,thefactthatthesetwocurvesintersectonlyat
Foreign'sinfluencepoweroverHomeleadstoachangeintheHome (μH,F,μF,H)=(0,0)isensuredbypart2ofProposition3(i.e.,bythefact
policy that is beneficialto Foreign.Similarly, an increase in Home's thatworldwelfaremustbehigheratanypoint(μH,F,μF,H)∈(0,1]×(0,1]).
influencepowerleadstoadecreaseintheForeigntariff.25 Fig. 1 corresponds to the case λ=1 so countries are fully
The second result in Proposition 2 indicates that the effect of symmetric except (possibly) for their influence power. The figure
foreigninfluencewillbeparticularlyfeltinrelativelylargecountries illustratesthataworldwithforeigninfluencewillParetodominatea
unlessthesecountriesarealsopoliticallystrong(intermsoftheirμ's). worldwithoutforeigninfluenceonlywheninfluence–powerimbal-
Thisresultmasksthecountervailingeffectoftwoforces.Ontheone ancesarenottoolarge.Fig.2considerstheimplicationsofahigherλ
hand,largecountriessethighertariffsandthustheabsolutechangein (inparticular,λ=1.75),soHomeisnowadisproportionatelylarge
thosetariffsresultingfromforeigninfluenceislikelytoberelatively country.Insuchacase,balanceddistributionsofinfluencepowerare
high. On the other hand, other things equal, large countries are nolongersufficienttoinduceParetogainsattheworldlevel.Whatis
relativelyimmunefromforeigninfluence,astheabsolutewelfaregain neededtogenerateParetogainsareincreasesininfluencepowerthat
attainedbyasmallinfluencingcountrywilltendtobesmall,andthis are biased towards the relatively large country (Home, in the
will reduce the foreign influence threat faced by the large country. graph).27Theintuitionforthisresultistightlyrelatedtothesecond
Proposition2indicatesthatthefirsteffectdominateswhenstudying statementinProposition2:asinthecaseoftarifflevels,theeffectof
foreign influence on welfare levels is disproportionately larger in
larger countries, because they impose larger externalities on their
23 IntheextremecaseinwhichμF,HN1,ourtheorypredictsthattheHomecountry
willadoptanimportsubsidy.Weshallassumethroughout,however,that(μH,F,μF,H)∈
[0,1]×[0,1].
24 AninterestingfeatureofthegeneralformulainEq.(8)isthatitcorrespondstothe 26 Yet,itisstraightforwardtoshowthat(theabsolutevalueofthe)elasticityofthe
empiricalfindingsinBrodaetal.(2008),whoestablishapositivecorrelationbetween Home tariff to Foreign's influence parameter μF,H is decreasing in λ, and thus in
importtariffsandinverseexportsupplyelasticitiesforWTOnon-members,butwitha percentage terms, tariffs are relatively more abated in relatively small countries.
coefficientmarkedlylowerthanthatimpliedbystandardtheory. Mathematically,itcaneasilybeverifiedthat−∂lnτˆH=∂lnμF;Hisdecreasinginλ.
25 As we show in our working paper version, this result is robust to alternative 27 Itisworthnotingthat,asaconsequence,thedistributionsofinfluencepowerthat
economicmodelsinwhichtheindirectutilityfunctionvj(⋅)isnotseparableineach ensureParetogainsmightbeassociatedwithmeagergainsinworldwelfarerelativeto
country'spolicy. aworldwithoutforeigninfluence.Wereturntothispointinthenextsection.
P.Antràs,G.PadróiMiquel/JournalofInternationalEconomics84(2011)135–148 141
Fig.1.Paretogainswithsymmetricsize. Fig.2.Paretogainswhenhomeislarger.
neighbors.28Wesummarizethisresultasfollows(formalresultsin be better off under the status quo with noncooperative tariffs than
AppendixA): under free trade. In the absence of lump-sum transfers across
countries, which has been a maintained assumption in our frame-
Proposition4. Incomparisontoaworldwithoutforeigninfluence(μH,F= work, it then follows that free trade will only come about for
μF,H=0),(i)asufficientlybalanceddistributioninforeigninfluencepower sufficientlysymmetriccountries.Wenextshowthat,inourmodel,a
willincreasewelfareinbothcountrieswhencountriesaresymmetric(i.e., freetradeagreementmaynotbeviableevenwhencountriesareof
λ=1);(ii)whenHomeislargerthanForeign(λN1),onlydistributionsin equalsize(λ=1),providedthatoneofthemhasdisproportionately
influencepowerthatarebiasedtowardsHomewillgeneratewelfaregainsin moreinfluencepowerthantheotherone.
bothcountries.
Notethatinourframework,anenforceablefreetradeagreement
correspondsto(cid:1)as(cid:4)hiftfrom(cid:5)awo(cid:4)rldinwh(cid:5)i(cid:3)cheachcountryobtainsa
Thissectionhasillustratedthebeneficialwelfarepropertiesassociated welfarelevelvj τˆj μH;F;μF;H ;τˆ−j μH;F;μF;H t(cid:1)oaworldinwh(cid:3)icheach
with foreign influence in situations in which countries have no other country obtains a welfare level equal to vj τˆjð1;1Þ;τˆkð1;1Þ — see
mechanism to correct inefficiencies stemming from cross-border Eqs.(9)and(10).Inwords,freetradeisisomorphictoanincreasein
externalities. In particular, even when Pareto improvements may both influence parameters from their initial values to 1. Part 2 of
sometimes demand an asymmetric distribution of influence power Proposition 3 ensures that if countries could negotiate a binding
acrosscountries,therequiredpositivecorrelationbetweeneconomicsize agreement while exchanging lump-sum transfers, the free trade
andinfluencepowerseemsempiricallyplausible.Asweshallseebelow, agreement would indeed be signed for any initial distribution of
this favorable view of foreign influence will be substantially qualified influence power in [0, 1]×[0, 1]. Nevertheless, in the absence of
whenweallowforotherformsofcooperationbetweencountries. means to transfer utility it is far less obvious that a sufficiently
powerfulcountrywillfinditappealingtosignsuchanagreement.
5.Foreigninfluenceandtradetalks Toillustratethis,Fig.3depictstheregionoftheparameterspace
(μH,F, μF,H)∈[0, 1]×[0, 1] such that both countries would favor an
In this section, we explore how foreign influence interacts with enforceable agreement.29 Withthemaintainedassumptionthatthe
international negotiations in internalizing terms-of-trade externalities. functionsvH(⋅)andvF(⋅)aresymmetric,itiseasytoshowthatthe
Thekeyquestionwewanttostudyisifthepositiveaspectsofforeign point(μH,F,μF,H)=(0,0)willnecessarilybelongtothisset,asshownin
influenceidentifiedabovesurvivetheintroductionofalternativemeansof the figure. In words, in the absence of means to affect foreign
restoring(orbringingcloser)internationalefficiency.Wewillfirstanalyze elections,bothcountrieswouldagreetosignanefficientinternational
theimplicationsofforeigninfluencefortheincentivesofcountriestosign agreement. Fig. 3 then shows that the emergence of imbalances in
agreements that set policies at their world welfare-maximizing level, influencepoweracrosscountriesmayleadtothepowerfulcountry
whichinourframeworkcorrespondstofreetrade.Later,wewillconsider blocking this efficient agreement. This result embodies a strong
thefeasibilityofmoregeneralinternationaltradeagreementsandwill intuition:if,absentanagreement,weakcountriesarealreadyforced
also characterize equilibrium agreements in the presence of foreign toacquiescewiththeinterestsofpowerfulcountries,thelatterhave
influence.Indoingso,wewillconsiderboththecaseinwhichagreements little to gain from concerted moves to world welfare maximizing
are enforceable (perhaps via the WTO) and the case in which these policies.
agreementsneedtobeself-enforcing(viareputationalmechanisms). We can also use an analogous graph to formally study the
interaction of economic size and influence power in affecting the
5.1.Foreigninfluenceandthefeasibilityoffreetrade viabilityoffreetradeagreements.Inparticular,considerthecasein
which λN1, so Home is a relatively large country (the case λb1 is
Inhisseminalpaper,Johnson(1953–54)showedthatwhentwo analogous).Insuchacase,Johnson's(1953–54)resultssuggestthat
countriesaresufficientlyasymmetricinsize,thelargercountrymight free trade might not be achieved even when influence power is
balanced (e.g., when μH,F=μF,H=0) because Home will block it. In
thosesituations,freetradewillonlybeachievablewhenever,despite
(cid:1) (cid:3) (cid:4) (cid:5)
28 Mathematically,onecanshowthat,whenλN1,wehave∂2vH τˆH;τˆF = ∂μF;H∂λb0,
(cid:1) (cid:3) (cid:4) (cid:5) (cid:1) (cid:3) (cid:4) (cid:5) (cid:1) (cid:3) (cid:4) (cid:5)
∂2vH τˆH;τˆF = ∂μH;F∂λb0;∂2vF τˆH;τˆF = ∂μF;H∂λ N0,and∂2vF τˆH;τˆF = ∂μH;F∂λ N0. 29 TheshapeofthecurvesinFig.3followsagainfromparts1and2ofProposition3.
142 P.Antràs,G.PadróiMiquel/JournalofInternationalEconomics84(2011)135–148
Fig.3.Feasibilityoffreetrade.
Fig.5.Freetradeandself-enforcingagreements.
itslargesize,Homeisworseoffwithouttheagreement.This,inturn,
can only happen when Home's influence power is small relative to can easily be plotted. Fig. 5 illustrates the region of the parameter
Foreign's so that, in the absence of agreement, Home is forced to space (μH,F, μF,H)∈[0, 1]×[0, 1] such that neither country deviates
imposeasmalltariffonForeign.Hence,whenλislarge,afreetrade fromaself-enforcingfreetradeagreementwhenδ=0.8andλ=1or
agreement will only be signed when μF,H is high relative to μH,F, as λ=1.25. As in the case of enforceable agreements, the graph
illustrated in Fig. 4 for the cases λ=1.25 and λ=2. In sum, the illustrates (and our Appendix A formally demonstrates) that (i) a
feasibilityofafreetraderequiresanegativecorrelationbetweensize sufficientlylargeincreaseinacountry'sinfluencepowerrendersfree
andinfluencepower.Itisinterestingtonotethat,intherealworld,we tradeinfeasible(asthiscountryoptimallychoosestodeviatefromthe
oftenseemtoobserveapositivecorrelationbetweeneconomicsize agreement), and (ii) an increase in a country's size needs to be
and influence power, which corresponds to situations in which accompaniedbyadecreaseintheirinfluencepoweriffreetradeisto
accordingtoouranalysis,theachievementoffreetradeisatgreater remainfeasible.Infact,whenδ→1,thecurvesinFig.5correspond
risk. exactlytothoseinthecaseofanenforceableagreement.30Notealso
Sofar,wehavefocusedonthestudyofenforceableagreements. thatasillustratedbyFig.5,whenδb1,thepossibilityarisesthatwhen
Suppose instead that no supranational institution has the ability to λ=1freetradewillceasetobefeasibleevenwheninfluencepoweris
ensure that international trade agreements are enforced. As is well evenly distributed (and, for λN1, even when influence power is
known,inthosesituationsfreetradecanstillbeachievedifthetariff negative correlated with size). The reason for this is that as the
gamebetweencountriesisrepeatedovertime.Inordertosavespace, punishmentpayoffsbecomecloserandclosertothefreetradeones,
we focus on the simplest case in which the game described in theincentivetodeviateforcountriesincreases.
Section 2 is infinitely repeated and governments play trigger We can summarize the results of this section as follows (see
strategies in tariffs, with the non-cooperative equilibrium with AppendixAforaformalproofofallthestatements):
foreign influence described above characterizing the punishment
payoffs.Insuchacase,ifgovernmentsdiscountthefutureatarateδ, Proposition 5. For each country j=H, F, there exists a threshold
μ˜j;k∈½0;1(cid:2)suchthatifμj;kNμ˜j;k,thencountryjwillfinditbeneficialtoopt
countryjwillnotdeviatefromfreetradeaslongas
out of either an enforceable or a self-enforcing free trade agreement.
vj1ð−1;δ1Þ≥vj(cid:1)τˆj(cid:1)μH;F;μF;H(cid:3);1(cid:3)+ 1−δδvj(cid:1)τˆj(cid:1)μH;F;μF;H(cid:3);τˆ−j(cid:1)μH;F;μF;H(cid:3)(cid:3): Fsiuzrethoefrcmouonretr,ythje(it.eh.r,e∂sμ˜hHo;lFd=μ˜∂j;λkbi0sannecde∂ssμ˜aFr;Hily=∂dλecNre0as)i,nimgpinlytinhgetrhealatttihvee
ð11Þ feasibility of a free trade agreement requires a negative correlation
between size and influence power. When countries are symmetric, a
balancedincreaseinforeigninfluence(startingfromμH,F=μF,H)willnot
AsshowninAppendixA,inoureconomicmodel,theseconditions
againdependonlyontheparametersμH,F,μF,H,λ,aswellasδ,sothey harm the feasibility of an enforceable free trade agreement, but a
sufficiently large balanced increase in foreign influence will always
renderaself-enforcingtradeagreementinfeasible.
Animmediatecorollaryoftheseresultsisthat,relativetoaworld
withoutforeigninfluence,worldwelfareunder“tradetalks”willbe
diminished by a sufficiently unbalanced distribution of influencing
poweracrosscountries,ormoreprecisely,byadistributionofpower
thatisnotsufficientlynegativelycorrelatedwithdifferencesinsize
across countries. Furthermore, if free trade agreements need to be
self-enforcing, world welfare may also be diminished (relative to a
world without foreign influence) when influence power is evenly
distributedbutlarge.Thisresultcontrastssharplywiththoseobtained
inthelastsectioninnon-cooperativescenarios.Inparticular,inthe
empirically plausible case in which economic size and influence
power are positively related, foreign influence appears to generate
Pareto gains under “trade wars”, while the results in this section
suggestthatitwillrenderfreetradeagreementsinfeasible,thereby
Fig.4.Freetradeandasymmetries. 30 Ourassumptionofseparabilityisimportantforthis.
P.Antràs,G.PadróiMiquel/JournalofInternationalEconomics84(2011)135–148 143
Fig.6.Freetradeasequilibriumagreement. Fig.7.Balancedpowerandwelfare.
reducingworldwelfare.Furthermore, ourlastresultforthecase of the case of negotiated enforceable agreements, our first result is a
symmetric countries and self-enforcing agreements illustrates that muchstrongercallfortheneedforbalancedinfluencedpower(see
balancedincreasesininfluencepowermayactuallyreducewelfarein AppendixAforaproof):
bothcountries,insharpcontrasttoourresultsinFigs.1or3.
Proposition6. Assumethatcountriesareofequalsize,i.e.,λ=1.When
trade agreements are negotiated under symmetric Nash bargaining,
5.2.Foreigninfluenceandequilibriumtradeagreements theexistenceofinfluencepowernecessarilyreducesworldwelfareunless
μH,F=μF,H.
Inthelastsubsection,wehavefocusedontheclassicalquestionof
the feasibility of a free trade agreement. Although these are focal Inotherwords,Proposition6indicatesthatanyimbalanceofpower
agreementsinaninternationaltradesetup,inthissectionwebriefly willreduceworldwelfarewhencountriesaresymmetric.Theresultis
consider the determination of equilibrium agreements, whereby obviouslyspecific to thecaseofsymmetriccountriesandsymmetric
governmentsareallowedtobargainoverpolicies(inthecaseofan Nashbargaining,butthegeneralinsightisthatthescopeforforeign
enforceableagreement)orjointlydecidetoself-enforceapotentially influencetoenhanceworldwelfareisgreatlyreducedrelativetothe
asymmetricagreement. analysesinSection4.ThisisillustratedinFig.6:foranyrelativesizeof
Inordertostudyenforceableagreements,oneneedstospecifythe the two countries, the lines depicted correspond to the unique
bargaining game that governs negotiations between countries. For configurationofinfluencepowersuchthatworldwelfareismaximized.
simplicity,weconsiderasymmetricNashbargaininggame,inwhich Consistentlywithourpreviousresults,itcallsforanegativecorrelation
countriessplitthegainsfromcooperationequally.31Theanalysisof between size and influence power. Furthermore, in contrast to
self-enforcing agreements in turn requires an equilibrium-selection Proposition 1, where we showed that any increase in any foreign
concept, and we find it natural to assume that countries agree on influenceparameterμj,kin[0,1]×[0,1]wouldraiseworldwelfare,we
sustainingtheworld-welfaremaximizingagreementamongthesetof now have that only specific (and empirically implausible) types of
feasibleagreements. increaseswillprovetobewelfareenhancing.Forinstance,thestriped
Inthelastsectionwearguedthatcountrieswithsufficientlyhigh area in Fig. 6 depicts the set of power configurations such that an
influencepowerwillnecessarilyoptoutofeitheranenforceableora increaseinμH,FwillincreaseworldwelfarewhenHomeistwiceaslarge
self-enforcingfreetradeagreement.Thisresultnaturallygeneralizes asForeign(λ=2).Clearly,thisisaverysmallsubsetof[0,1]×[0,1]and
to the case of asymmetric trade agreements. In particular, even itinvolvesthesmallForeignbeingconsiderablymorepowerfulthanthe
though equilibrium agreements will tend to be biased in favor of largeHome.
powerful countries, any such trade agreement will be rendered We conclude this section by studying the effects of balanced
unsustainablebyasufficientlylargeincreaseintheinfluencepowerof increasesininfluencepowerontheshapeofthe “best”sustainable
acountry.Thederivation(andintuition)forthisresultisanalogousto equilibriumforthecaseofself-enforcingagreements.Withsymmet-
thatinthecaseoffreetradeagreements,sowewillnotrepeatithere. ric countries, we have the following particularly sharp result (see
The fact that foreign influence may affect the shape of equilibrium AppendixAforaproof):
agreementshoweverraisesnewissuesregardingtheeffectsofforeign
influenceonworldwelfare.Wedevotetheremainderofthissection Proposition 7. Assume that countries are of equal size, i.e., λ=1 and
tostudythesequestions. supposethatinfluencepowerisbalancedacrosscountries,i.e.,μH,F=μF,H=
In the interest of space, we mostly focus on the case in which μ.Then,ifthiscommoninfluencepowerμishigherthanthediscountrate
countriesaresymmetricintermsofeconomicsize.Rememberthatin δ(μNδ),theonlysustainableequilibriumpoliciesarethestaticNashpolicies
(cid:1) (cid:3)
previous sections, we have argued that, when countries are τˆH;τˆF .Furthermore,forμbδ,thelowestsustainableequilibriumtariffs
symmetric, positive and balanced levels of influence power may
have good welfare properties because (i) they increase welfare in τ⁎H=τ⁎F=τ⁎areweaklyincreasinginμ.
bothcountriesintheabsenceoftradeagreements,and(ii)theyare
lesslikelytorenderwelfare-enhancingtradeagreementsinfeasible.In
Fig. 7 illustrates how the lowest sustainable equilibrium tariffs
(cid:1) (cid:1) (cid:3) varywiththecommoninfluenceparameterμ.32Asisclearfromthe
v3H1(cid:1)τˆFHo;rτˆmF(cid:3)aÞll1y=,2w(cid:1)evFh(cid:1)aτv⁎eHt;hτa⁎tF(cid:3)e−quvilFi(cid:1)bτˆrHiu;τmˆF(cid:3)p(cid:3)o1li=c2i;esw(hτe⁎rHe,ττˆH⁎Fa)nmdaτˆxFimairzee:givveHnτin⁎HE;qτs⁎.F(9−) graph, the effect of μ on these tariffs is non-monotonic. When μ is
and(10),andwefocusonparametervaluessuchthatthesecond-orderconditionsof
thisproblemaremet. 32 Inthefigure,wealsoassumea=1,αL=2,αS=1,aswellasλ=1.
144 P.Antràs,G.PadróiMiquel/JournalofInternationalEconomics84(2011)135–148
sufficientlylow,freetradeissustainable(asshowninthelastsection) theForeigngovernment.UsingEq.(2)andnotingagainthatτF=τF=τF,
I O
andτ⁎H=τ⁎F=τ⁎=1.Nevertheless,whenμexceedsagivenvalue, weobtainthattheForeigngovernmentwillseteFtomaximize
free trade ceases to be sustainable and cooperation is hindered by
balanced increases in influence. In that parameter range, world (cid:1) (cid:3) (cid:1) (cid:3)(cid:1) (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3)(cid:3)
welfareisactuallyreducedbybalancedincreasesininfluencepower. WIF eF =αFPIF + 1−αF PIHvF τHI ;τF + 1−PIH vF τHO;τF
sFhinoawllny,ifnorPμroNpδo,osintiloynth2e,sthtaetsiceNeqasuhiliebqruiuilmibrpiuomliciiesssuasrteaidneacbrleea,sainngdains −1(cid:1)eF=ϕF(cid:3)2;
2
influencepower.Insum,thisresultsuggeststhatbalancedincreases
ininfluencepowermay,insomecircumstances,reducewelfareinall
countriesevenwhenthesecountriesarefullysymmetric. subjectto PIH being given in Eq.(12).This programyields a unique
equilibriumForeigninfluencelevel:
6.Conclusion
(cid:1) (cid:3) (cid:1) (cid:1) (cid:3) (cid:1) (cid:3)(cid:3)
Inthispaper,wehavestudiedthewelfareimplicationsofforeign eˆF =− 1−αF γHϕF vF τHI ;τF −vF τHO;τF : ð13Þ
influence.Wehaveshownthatthepossibilityofforeignmeddlingin
electoralprocessesmayprovetobewelfareenhancingfromthepointof
viewofworldaggregatewelfare.Thereasonisthatforeigninfluenceis Regarding the incentives of the Home government to exert
not random: foreigners will only exert costly influence whenever influence,notethattheHomegovernmentsolves
policiesintheinfluencedcountrygenerateexternalitiesonthem.Asa
result,thepossibilityofforeigninfluencemayhelppartiallyalleviate (cid:1) (cid:3) (cid:1) (cid:3)(cid:1) (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3)(cid:3)
externalities arising from cross-border effects of policies. This also WIH eH =αHPIH + 1−αH PIHvH τHI;τF + 1−PIH vH τHO;τF
mcoeuanntsrieths,atthaesexloisntgenacseionfflfuoerenicgenpinoflwueernicsenmoatyvbeeryPaurnebtoalsaunpceerdioarcwroitshs −12(cid:1)eH=ϕH(cid:3)2;
respecttoaworldwherenosuchmeddlingwaspossible.
However,wehaveshownthatthesepositiveresultsneedtobe
strongly modified if countries have access to other means of subject to PIH being given in Eq. (12). Because the incumbent's
mitigating externalities, such as the possibility of signing interna- electoralprospectsatHome(PIH)areindependentofeH,thesolution
tionalagreements.Inthiscase,theexistenceofforeigninfluencevery tobeaboveproblemistrivialandyieldseˆH =0.
oftenreducesworldwelfarebyrenderinggoodagreementsunfea- Wenowmovetothepolicyannouncementstage(t=1).Consider
sible.Wehavealsoshownthat,inthecontextoftradepolicy,foreign thechoiceoftheincumbentpartyincountryHwhenthetwoparties
influence is most damaging when it is positively correlated with in country F have announced a common policy τF∈Ψ. I seeks to
economicsize. maximizeitswelfareWIHinEq.(2)subjecttotheinfluence“reaction
Ourframeworkisadmittedlyspecialinmanyrespects.First,inour function” in Eq. (13) and subject to PIH being given by Eq. (12).33
deterministicsetup,foreigninfluenceonlyoccursoff-the-equilibrium Straightforward manipulation delivers the following first-order
path.Itwouldbeinterestingtomodifyourmodelsoastodeliversharper conditionforthechoiceofτIH:
predictionsregardingthetypeofsituationsinwhichweexpectforeign
influencetoemergeinequilibrium,andalsoinordertotakeintoaccount 2 (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:1) (cid:3) (cid:1) (cid:3)(cid:3)3
tSheecsoendc,oosutsrminodeevlahluaastainbgstrtahcetewdefrlfoamredgoaminesstifcrocmonflfoicrtei(genithinerfldureinvceen. 664αHγ(cid:1)H+ 12(cid:3)1−(cid:1)αH +(cid:3)2(cid:1) 1−(cid:3)α(cid:1)H (cid:1)γH vH(cid:3)τHI;τ(cid:1)F −vH(cid:3)(cid:3)τHO;τF 775
byideologyorspecialinterests):theinfluencingeffortsofeachcountry's + 1−αH ϕF 1−αF γH 2 vF τH;τF −vF τH;τF
incumbentgovernmenthavesoughttoprotectthegeneralinterestsof (cid:1) (cid:3) I O
its population. In practice, foreign influence often defends in a × ∂vH τHI;τF +(cid:1)αH+(cid:1)1−αH(cid:3)(cid:1)vH(cid:1)τH;τF(cid:3)−vH(cid:1)τH;τF(cid:3)(cid:3)(cid:3)ϕF
disproportionatemannertheinterestsofparticulareconomicagents. ∂τHI (cid:1) (cid:3) I O
Itseemsreasonablethatapropermodelingoftheseforcescouldleadto (cid:1) (cid:3)(cid:1) (cid:3) ∂vF τH;τF
furtherqualificationsofourmainwelfareresults. × 1−αF γH 2× ∂τIH =0: ð14Þ
I
AppendixA
Atthesametime,theoppositionseekstomaximize
A.1.ProofofProposition1
(cid:1) (cid:3) (cid:1) (cid:3)(cid:1) (cid:1) (cid:3) (cid:1) (cid:3) (cid:1) (cid:3)(cid:3)
To prove existence we focus on analyzing unilateral deviations WH =αH 1−PH + 1−αH PHvH τH;τF + 1−PH vH τH;τF
fromaconvergentequilibriumbyasinglepoliticalpartyinoneofthe O I I I I O
twocountries.ConsiderthecaseinwhichτF=τF=τFbutτH≠τH.
I O I O
Wesolvethegamebybackwardsinduction.Considerfirstthelast subjectalsotoEq.(13)andtoPHbeinggivenbyEq.(12).Thefirst-
stage,atwhichpointtheplatforms(τH,τH,τF,τF),theforeigninfluence I
I O I O orderconditionoftheproblemisthen
levels(eH,eF),andtheperceptionshocksξHandξFhavebeendetermined
inbothcountries.VotersatHomenowmaximizeEq.(1)byvotingforthe
(cid:1) (cid:3)
iinnccuummbbeennttppaarrttyywathHeonmeveerwviHn(sτtIHh,eτFe)l−ectviHo(nτOHw,iτtFh)+proξHba−bielFitNy0.Thusthe −αH∂PIH +(cid:1)1−αH(cid:3)(cid:1)1−PH(cid:3)∂vH τHO;τF
∂τH I ∂τH
O O
(cid:1) (cid:1) (cid:3) (cid:1) (cid:3) (cid:3) (cid:1) (cid:3) (cid:1) (cid:1) (cid:3) (cid:1) (cid:3)(cid:3)
PH = 1 +γH vH τH;τF −vH τH;τF −eF : ð12Þ + 1−αH ∂PIH vH τH;τF −vH τH;τF =0
I 2 I O ∂τH I O
O
Considernowthestageofthegameatwhichtheextentofforeign
33 Intheobjectivefunctionoftheincumbentparty,wecanignoretheeffortcost
ainnflduξeFnacreeisstidlleucnidkendo.wRenm.CeomnsbiedrerthfiartstatthtehicshpooicientofthfoerreeiganlizinatfliounesncoefbξyH wasesohcaiavteedseweniththeaHtwbeecmauussetshtaavrteineˆgHf=rom0.asymmetricequilibriumwithτIF=τOF=τF,