Tariff determination in general equilibrium : a bargain-theoretic approach to policy modelling
Date
1992
Authors
Pant, Hom Moorti
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Abstract
Government policies with redistributive implications have been a source of
many social and political conflicts. Until recently, positive economics has lacked a
consistent analytical framework that could explain how such policies are formed and
how they respond to exogenous shocks. This study makes a contribution towards this
direction by offering a consistent theoretical framework for short-run policy modelling.
Assuming that tariff rates are the only available instruments of a government’s
redistributive policy this study addresses the following two specific questions: (i) how
the tariff rates are determined; (ii) and how do they respond to exogenous shocks?
To answer these questions, a general equilibrium model of a political economy
is developed by combining a model of the political sphere with a Ricardo-Viner type
model of the economic sphere. Policies are determined by strategic interactions between
government and the conflicting interest groups in the political sphere which, in turn,
determine the welfare of the interest groups in the economic sphere and political
support for the government in the political sphere. The conflicting interest groups may
spend resources in predatory political activities or may choose to cooperate. A general
equilibrium of the political economy is obtained when both the political and the
economic spheres are simultaneously in equilibrium. Under fairly general conditions, it
is shown that at least one equilibrium exists in a political economy whether it exhibits
cooperative behaviour in the political sphere or not
This study has employed the analytical framework of cooperative-bargaining
theory in obtaining a general equilibrium model of the political economy. This
approach is taken because a noncooperative equilibrium is not necessarily Pareto
efficient Several interesting results follow from the comparative static properties of the
model. In particular, it is shown that: (i) the import-competing sector receives increased
protection if the relative price of the home importable falls in the world market; (ii) the
protection afforded to a particular sector declines if the domestic endowment of factors
moves in favour of that sector, and (iii) so long as the distribution of relative bargaining
power remains unaffected by the shocks, the response of the tariff rate to the shocks
will be independent of the distribution the bargaining power. These analytical results
are very similar to ones that follow from the maximization of a conservative social
welfare function. The implications are that: (i) a government’s redistributive policy
could be modelled as an equilibrium outcome of a bargaining process between the
organized interest groups holding conflicting interests on the level of the redistributive
policy; and (ii) the bargaining process may be viewed as the mechanism of generating a
conservative social welfare function. The self-interest, and public-interest approaches in
policy modelling can thus be reconciled.
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