By Alan Verne Deardorff, Robert Mitchell Stern
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He concludes (p. " Why are trade policies universally biased against trade? Even with only trade policies admitted into the models as tools, many of them have the unfortunate implication that trade should be subsidized as often as it is taxed. That is, the same considerations that lead a government to favor an importcompeting industry with a tariff should lead it to favor export industries with export subsidies. Yet this is clearly not the case in the real world, where explicit export subsidies are confined primarily to agriculture, while tariffs and other trade restrictions have been applied pretty much across the board for industrial products.
However, the approach suffers in all cases from the unreality of the assumption that individual tariffs are determined by majority vote, which is virtually never the case in practice. Magee, Brock, and Young (1989) (MBY) sought greater realism in modeling the electoral process by assuming representative democracy. To the 2x2x2 H-O trade model they added two political parties, one favoring free trade and the other protection, plus two lobbying groups, representing the interests of the two factors of production.
An additional transaction cost is also present here, however, if the principals cannot act together. Acting independently, and even if each cares only about a separate dimension of the agent's behavior, they nonetheless will provide incentives to the agent to skimp on its service of other principals, in order to get more for themselves. The result is even worse than the second-best outcome that could have been achieved had they acted together. Dixit shows, however, that if principals can be prevented from penalizing the service to other principals, perhaps by removing their access to information about that service, then the principals acting separately will do better than even the second-best outcome they could have achieved together.