Negotiated Trade Restrictions with Private Political Pressure

Abstract

We consider a home government with political pressure to restrict trade. The foreign country is compensated with a portion of the tariff revenues or quota rents, but cannot directly observe the political pressure abroad. In this setting, the two countries negotiate over the volume of trade and transfer of rents, depending on the level of political pressure. We determine globally optimal, incentive-compatible trade policies, in which the home government has no incentive to overstate (or understate) the pressure for protection.