Screening for losers: Trade institutions and information

Abstract

Trade law scholars have often argued that international institutions can serve a useful domestic political role by providing a constraint against domestic demands for protection. In this paper, I identify a new way in which such institutions and their particular features can be valuable to governments: namely, that they can provide useful information about domestic political groups. While governments are responsible for the administration of most legal trade-related actions, the information that governments need to determine which actions to pursue is often the private information of the firms and interest groups that are lobbying for these actions, and there are significant incentives for such groups to misrepresent this information. This paper uses a formal model to demonstrate that governments can use the multitude of legal options available to them to screen between domestic groups for those with the strongest cases; a selection process which can help to explain, amongst other things, why trade remedies tend to be structured around meeting criteria instead of as “efficient breaches” requiring compensation and why disputes pursued via the WTO have such a high rate of success (approximately 90% for cases that reach the panel stage).

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Notes

  1. 1.

    Trade Talks Podcast https://www.piie.com/experts/peterson-perspectives/trade-talks-episode-93-us-trade-policy-trump-ambassador-michael-froman

  2. 2.

    See Panel Report, US-Zeroing (Korea)

  3. 3.

    Baccini and Kim (2012) empirically explore how this state-level logic applies to PTAs.

  4. 4.

    These two mechanisms are not in tension; indeed, both kinds of information transfer may very well be important to explaining the value of institutions. Governments may care both about signaling their type to their constituents, and extracting information from domestic interest groups.

  5. 5.

    In a more recent paper, Pelc and Urpelainen (2015) look to explain why efficient breach is more common in investment agreements than in trade agreements using a bargaining model of domestic groups and the government. Their model suggests a similar principal-agent dynamic in the design and implementation of trade institutions to the one I’ve outlined; this paper’s model provides new insights by focusing on the private information of domestic groups that is endemic to this bargaining dynamic, producing (for instance) a novel explanation for the criteria-based system of governance for trade remedies.

  6. 6.

    Trade Talks Podcast https://www.piie.com/experts/peterson-perspectives/trade-talks-episode-93-us-trade-policy-trump-ambassador-michael-froman

  7. 7.

    Johnson (2015) describes how information revelation occurs for environmental cases that proceed to WTO panels, noting that “WTO agreements specify the kinds of private information a trade-restricting state ought to possess, and the WTO dispute settlement process elicits the revelation of that information if another state complains” Johnson (2015, p. 213).

  8. 8.

    Could the first mechanism of information revelation - decisions by panels (or their threat) - be replicated by a domestic institution? This is theoretically possible, but: (1) it would be significant more costly to have each state construct their own comparable institution; (2) there would be greater potential that any such agency could be captured by domestic political interests - indeed, some have argued that the USITC and Department of Commerce determinations for trade remedies have exhibited exactly this kind of bias (Hansen 1990; Hansen and Prusa 1997); (3) some countries may simply not have access to the level of trade law and economics expertise required for panel rulings to be very informative, and in any event an international institution’s ability to capitalize on a larger pool of expertise is likely to give it an edge.

  9. 9.

    Chad Bown in The Washington Post, April 21 2018.

  10. 10.

    Work focusing on these other observable features includes (Grossman and Helpman 1994; Gilligan 1997; Bombardini 2008; Kim 2017) on lobbying; Mansfield et al. (2000) and Milner and Kubota (2005) on political institutions (particularly democracy); McGillivray (2004) and Kim and Margalit (forthcoming) on political geography.

  11. 11.

    The applications sections of this paper discusses these kinds of comparisons in more detail.

  12. 12.

    Note that the existence of derivatives of the probability functions implies those functions are continuous across their domains in 𝜃. In this paper, all functions of 𝜃 will be continuous.

  13. 13.

    When might a linear shift be insufficient? One could imagine circumstances where observable features of political influence interact with unobservables; many such interactions could be treated as simply changing the shape of g(𝜃) in a way that retains a similar positive monotonic order in 𝜃, resulting in different cutoffs while leaving the analysis largely unchanged. However, it is possible to conceive of cases where this approach would not be sufficient. For instance, some firm-level theories of trade predict greater levels of political influence for the largest, most productive firms (see Bombardini 2008), who might also be more resilient to import competition - this would imply that greater injury and influence could be inversely related, in a way that would complicate the model’s predictions. However, one might also expect such large firms to focus more on pursuing legal cases that affect their exports than on pursuing protection, which would again align unobservable case strength and influence. While exploring these interactions would be a valuable and informative area of inquiry, this paper abstracts away from these considerations in the interest of focusing attention on the core screening dynamic that is its main subject.

  14. 14.

    Formally, this is the case if \({\int \limits }_{0}^{\bar w} g_{P}(\theta )\pi _{P}(\theta )f(\theta )d\theta \leq 0\).

  15. 15.

    The conditions of Lemma 1 are sufficient but not necessary for a separating equilibrium. A more thorough account of separating equilibria is included with the proof of Proposition 6.

  16. 16.

    The Commerce Department has ruled in favor of claimants more than 80% of the time (USITC2010 p. 4).

  17. 17.

    How often? This is a tricky question to answer conclusively because we do not directly observe the universe of requests for dispute settlement, given that this process unfolds informally between firms and/or industrial interests and governments. However, Davis and Shirato (2007) look to address this selection problem by exploiting data from Japan which documents which policies of major trading partners they believe are WTO-non-compliant, and conclude that “the WTO disputes governments choose to pursue largely reflect the variation in industry demand” (Davis and Shirato 2007, p. 274), further arguing that the relatively low number of disputes initiated by Japan is in large part due to “low demand” (Davis and Shirato 2007, p. 275), while Davis (2012) argues that the United States is even more responsive to demands from industry for disputes. All of this provides support for my claim that firm and industrial demands for dispute settlement are regularly pursued by governments, with the key limiting factor that industries are sparing in those requests. Former USTR Michael Froman also suggests a similar dynamic in an interview, when he notes that one the main constraints in launching enforcement actions during his tenure was when an affected industry “was unwilling to put its head up or raise its hand” (Trade Talks Podcast, Episode 93), again suggesting that industries’ self-restraint was the key limiting factor for disputes, rather than governments rejecting demands from such industries.

  18. 18.

    If, however, rejection from one mechanism leads to other actions also being overturned - for example, if a negative ruling in dispute settlement on subsidies leads to CVDs being removed - then this would more properly be thought of as an instance of the original version of the model, where groups choose whether to pursue a more stringent remedy knowing they have a higher probability of losing all remedies as a consequence. In this case, the benefit derived by the group from the more stringent remedy would include the value of the less stringent one that may be applied simultaneously.

  19. 19.

    For instance, Investor-State Dispute Settlement (ISDS) mechanisms are common institutional mechanisms for dealing with issues like government expropriation.

  20. 20.

    Blonigen and Bown (2003) provides evidence of this occurring.

  21. 21.

    90% refers to the success rate for complainants in disputes that proceed to the panel stage (Davis 2012). However, approximately half of cases are mutually resolved in the pre-panel stage. For those cases that are settled without an official ruling, it is of course more difficult to measure the outcomes; Busch and Reinhardt (2003) attempt to code directly whether concessions were made at any point in the process, and find an approximately 82% success rate for developed countries obtaining full or partial concessions (Busch and Reinhardt 2003 p. 725). Moreover, a recent working paper (Lee and Wittgenstein 2017) that builds on Busch and Reinhardt (2003) but updates the data to include cases up to 2009 suggests an even starker situation; it finds that 98% of cases that are settled in the pre-panel stage result in full or partial concessions. While the particular numbers can be debated, it can be safely concluded that the success rate for cases screened to the WTO is very high.

  22. 22.

    This pre-filing rejection process as applied to CVDs is discussed openly by Commerce Department officials in The Washington Post, July 13 2003.

  23. 23.

    Indeed, in a conversation with Brazilian business leaders shortly after steel tariffs went into effect, former USTR Robert Zoellick admitted the tariffs had been implemented “to manage political support for free trade at home.” New York Times, March 14 2002. Moreover, Joshua Bolten, the White House Chief of Staff at the time, claimed in an interview with Christina Davis that “They knew when imposing the safeguard measure in March 2002 that it would be challenged with a WTO complaint (indeed eight members would file complaints against the measure), and also fully planned to end the measure” (Davis 2012, p. 42).

  24. 24.

    May 21 1986, The New York Times.

  25. 25.

    For instance, the Trump Administration had launched 162 CVD and antidumping investigations as of May 2019 – a 224% increase over the same period during the Obama Administration. Los Angeles Times, May 17 2019.

  26. 26.

    The use of Section 232 security exemptions to protect steel, aluminum, and (possibly) automobiles has been singled out by many as a particular threat to the stability of the international trade regime.

  27. 27.

    This is essentially statewise dominance of g+(𝜃) over g(𝜃).

  28. 28.

    As examples, historically, safeguard measures have been pursued by US governments in less than 50% of the instances in which the USITC gave the government the opportunity to impose them, and Section 232 has been used only twice out of 14 investigations (Bown and Joseph 2017). As of the time this was written, the Trump administration had pursued both safeguards cases that had gone through the USITC (on washing machines and solar panels), had implemented Section 232 tariffs on steel and aluminum, and had launched a Section 232 investigation into autos and auto parts.

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Acknowledgments

Many thanks to Marc Busch, Alan Deardorff, Rob Franzese, Barb Koremenos, Elizabeth Menninga, Jim Morrow, Iain Osgood, Joe Ornstein, Jennifer Tobin, and the reviewers at Review of International Organizations for giving detailed and helpful feedback on prior drafts of this paper. Thanks also to the participants in the Formal Models in International Relations Conference at USC in 2016 for their comments on a much earlier draft of this paper.

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Appendix A: Shifts in protectionist sentiment

Appendix A: Shifts in protectionist sentiment

Since the election of Donald Trump in 2016, there has been a significant shift in the way that trade remedies and trade institutions have been used by the US government,Footnote 25 in a way that seems largely inconsistent with prior practice, and which threatens to upend the stability of international institutions like the WTO.Footnote 26 While at first glance these changes might seem inconsistent with the screening story outlined in this paper, the model can in fact provide significant insight into the situation by treating the changes as the result of an upward shift in protectionist sentiment.

Specifically, the model would treat a significant upward shift in protectionist sentiment in the government as a shift upward in g(𝜃), where this is defined as a move to some g+(𝜃) such that:

$$ \forall \theta \in {\Theta}, g^{+}(\theta) \geq g(\theta) $$

and

$$ \exists {\Theta}^{\prime} \subset {\Theta} \text{with positive Lebesgue measure such that}g^{+}(\theta^{\prime})>g(\theta^{\prime}),\forall \theta^{\prime} \in {\Theta}^{\prime} $$

This just means that there exists some non-measure-zero subset of the type space such that g(𝜃) has increased over that subset; intuitively, Government gets higher utility for some potential types of firms under g+(𝜃) then under g(𝜃).Footnote 27 Thus, we can consider the comparative statics exercise of assessing what happens in the model with this upward shift in g(𝜃). To start, we have the following proposition.

Proposition 8

A shift upward in g(𝜃) makes a pooling outcome where every firm gets protection more likely by increasing the likelihood that the conditions of Propositions 1 or 2 will be met.

Proof later in the Appendix. Thus the model’s predictions fit well with what we have observed during the Trump administration, i.e. a situation where virtually every petition by an interest group has been pursued by the government after an upwards shift in protectionist sentiment.Footnote 28

Perhaps even more importantly, we can also consider what impact an upward shift in protectionist sentiment would have on the value placed by the government on the institution itself. Recall from Proposition 5 that a government prefers institutional regulation to a world of unilateral protection if:

$${\int}_{\bar w}^{w} g(\theta) \pi_{S}(\theta) f(\theta)d\theta > {{\int}_{0}^{w}} g(\theta)f(\theta)d\theta$$

If g(𝜃) increases, the downside risk entailed in πS(𝜃), where institutions reject cases determined by the government to be worth pursuing, becomes more important than the benefits obtained from screening out low types - particularly given that fewer types (if any) are likely to fall below the threshold where g(𝜃) < 0. This leads to the following proposition.

Proposition 9

An upward shift in protectionist sentiment makes Government more likely to prefer the outcome obtained without an institution to an institution-induced separating equilibrium.

Proof later in the Appendix. In other words, an upward shift in protectionist sentiment makes the government less likely to value the institution, and consequently more likely to risk its collapse, because the revealed information becomes relatively less valuable.

Proof of Proposition 1

Proposition 1 encompasses two pooling Perfect Bayesian Nash equilibria (PBNE), each of which is conditional on different off-equilibrium path beliefs. Consider first the following conjecture, where Government G and the interest group I pursue the following strategies σG and σI respectively:

$$\sigma_{G} = \begin{cases} Accept & \text{ if } I \text{ pursues PER}\\ Reject & \text{ if } I \text{ pursues STR} \end{cases}$$
$$\sigma_{I} = \text{PER, }\forall \theta \in {\Theta}$$

This is incentive compatible for all 𝜃 types of I by earlier assumption; at least one institution is assumed to be profitable. For Government, Accept is better than Reject if:

$${{\int}_{0}^{w}} g(\theta)\pi_{P}(\theta)f(\theta)d\theta \geq 0$$

Because in this conjecture, all types choose PER. Reject is better than Accept upon observing STR when off-equilibrium path beliefs \(q \sim p(q)\) are such that:

$${{\int}_{0}^{w}} g(q)\pi_{P}(q)p(q)dq \leq 0$$

However, if we reverse this condition, G’s strategy must change to Accept|STR. However, this does not change I’s best response: since πS(𝜃) < πP(𝜃) ∀𝜃 ∈Θ and cS > cP by assumption, v(𝜃)πS(𝜃) − cS < v(𝜃)πP(𝜃) − cP, which ensures that PER remains I’s best response. Thus, a new equilibrium holds where:

$$\sigma_{G} = \begin{cases} Accept & \text{ if } I \text{ pursues PER}\\ Accept & \text{ if } I \text{ pursues STR} \end{cases}$$
$$\sigma_{I} = \text{PER, }\forall \theta \in {\Theta}$$

Proof of Proposition 2

Consider the conjecture:

$$\sigma_{G} = \begin{cases} Reject & \text{ if } I \text{ pursues PER}\\ Accept & \text{ if } I \text{ pursues STR} \end{cases}$$
$$\sigma_{I} = \text{STR, }\forall \theta \in {\Theta}$$

If I pursues PER, they are rejected and receive a payoff of 0. So they choose STR if v(𝜃) − cS ≥ 0, which is true ∀𝜃 ∈Θ by condition 2 of the proposition.

Similar to Proposition 1, Government receives a payoff of:

$${{\int}_{0}^{w}} g(\theta)\pi_{S}(\theta)f(\theta)d\theta$$

for Accept, which is ≥ 0 (and thus is preferable to rejecting) by condition 1 of the proposition. Thus, all we need to ensure this is a PBNE is to set off equilibrium path beliefs \(q \sim p(q)\) such that Government prefers to reject when they observe PER, which is ensured condition 3 of the proposition, i.e.:

$${{\int}_{0}^{w}} g(q)\pi_{P}(q)p(q)dq \leq 0$$

Proof of Proposition 3

Each of these pooling equilibria rely on Government rejecting any deviations by I to another institution other than the one conjectured; ensuring this is simply a matter of setting the correct off-equilibrium path beliefs, as outlined in the proposition. Under these circumstances, I is indifferent between institutions, receiving a payoff of 0 in either case. Then, all that remains to ensure a PBNE is for Government to prefer to Reject rather than Accept given that all types are pursuing claims via that institution; the conditions ensuring this are also outlined in the proposition. Thus, we have two pooling equilibria, one under the conditions outlined in Proposition 3 part (i):

$$\sigma_{G} = \begin{cases} Reject & \text{ if } I \text{ pursues PER}\\ Reject & \text{ if } I \text{ pursues STR} \end{cases}$$
$$\sigma_{I} = \text{PER, }\forall \theta \in {\Theta}$$

And one under the conditions outlined in Proposition 3 part (ii):

$$\sigma_{G} = \begin{cases} Reject & \text{ if } I \text{ pursues PER}\\ Reject & \text{ if } I \text{ pursues STR} \end{cases}$$
$$\sigma_{I} = \text{STR, }\forall \theta \in {\Theta}$$

Proof of Corollary 1

Consider any \(\bar w\) where \(g(\bar w) \neq 0\). If \(g(\bar w) <0\), then since g(𝜃) is continuous and monotonically increasing, and since there must exist \(\hat \theta \) such that \(g(\hat \theta )>0\) (otherwise it could not be that UG(Accept|STR) ≥ 0), there must exist some \(\tilde w >\bar w\) such that \(g(\tilde w) =0\). Furthermore, it must be the case that \(\forall \theta \in (\bar w, \tilde w)\), g(𝜃) < 0. This set, ΘL in Corollary 1, represents types of firms receiving Government protection that a perfectly informed Government would turn down. Symmetrically, if \(g(\bar w)>0\), there must exist \(\tilde w < \bar w\) such that \(g(\tilde w) = 0\), implying that \(\forall \theta \in (\bar w, \tilde w)\), g(𝜃) > 0. This set, ΘH in Corollary 1, represents types of firms that do not receive Government protection that a perfectly informed Government would protect. □

Proof of Lemma 1

We are comparing the following two values:

$$U_{I}(STR)= v_{S}(\theta)\pi_{S}(\theta) - c_{S}$$
$$U_{I}(PER) = v_{P}(\theta)\pi_{P}(\theta)-c_{P}$$

Since πP > πS and probabilities are bounded above by one, \(lim_{\theta \rightarrow w} \pi _{S}(\theta ) = 1\) implies that \(lim_{\theta \rightarrow w} \pi _{P}(\theta ) = 1\) by squeeze theorem. Thus by applying properties of limits, we can compute the following:

$$lim_{\theta \rightarrow w} U_{I}(STR) = (1) lim_{\theta \rightarrow w} v_{S}(\theta) - c_{S}$$
$$ lim_{\theta \rightarrow w} U_{I}(PER) = (1) lim_{\theta \rightarrow w} v_{P}(\theta) - c_{P}$$

Since cP and cS are identical, this suggests that as \(\theta \rightarrow w\), UI(STR) > UI(PER), since vS(𝜃) > vP(𝜃),∀𝜃 ∈Θ. Thus, since we have earlier assumed that there exists \(\hat \theta \) such that \(U_{I}(STR|\hat \theta ) < 0\), which implies that \(U_{I}(PER|\hat \theta )>U_{I}(STR|\hat \theta )\), by the continuity in 𝜃 of vP and vS and the intermediate value theorem, there must exist some 𝜃 such that UI(STR) = UI(PER).

However, in order to establish that this point \(\bar w\) is a cutpoint, we must further establish that all types above that point prefer STR and all types below that point prefer PER. To ensure this, consider that I prefers STR over PER whenever:

$$ v_{S}(\theta)\pi_{S}(\theta) - c_{S} - v_{P}(\theta)\pi_{P}(\theta)+c_{P} >0 $$

Which if cP = cS,

$$ \leftrightarrow v_{S}(\theta)\pi_{S}(\theta)-v_{P}(\theta)\pi_{P}(\theta)>0 $$

The final condition of Lemma 1 ensures that this expression is strictly monotonically increasing in 𝜃; consequently, the inequality is satisfied for all 𝜃 types above \(\bar w\) and not satisfied for all 𝜃 types below \(\bar w\). Thus \(\bar w\) is a cutpoint. □

Proof of Proposition 6

This proof largely follows from the discussion in text and the Proof for Lemma 1. Lemma 1 establishes that I will adopt the strategy outlined in Proposition 6 in response to Proposition 6’s conjectured strategy by Government. The additional conditions in Proposition 6 ensure that Government’s strategy is a best response to I’s cutpoint strategy, by stating that the payoff to Government of accepting claims by the subset of types screened to either institution is still higher than what is obtained by rejecting all claims to that institution.

However, some discussion of the role of Lemma 1 is warranted. Without the conditions of Lemma 1, a separating equilibrium is still possible, but it has a somewhat less clean interpretation. Consider that without the monotonicity assumption from Lemma 1, there need not be a cutpoint above which types select into the more stringent institution; indeed, while higher types will have higher valuations from STR and higher probabilities of success than lower types, it would be possible that their probability of success and valuations might increase faster for PER, leading to a peculiar situation in which higher types might select into the less stringent institution. In this case, instead of a cutpoint strategy, we can construct the following strategy for I:

$$\sigma_{I} = \begin{cases} STR & \text{ if } v_{S}(\theta)\pi_{S}(\theta)-c_{S} \geq v_{P}(\theta)\pi_{P}(\theta)-c_{P}\\ PER & \text{ if } v_{S}(\theta)\pi_{S}(\theta)-c_{S}< v_{P}(\theta)\pi_{P}(\theta)-c_{P} \end{cases}$$

Noting that depending on the shape of the probability and benefit functions, these two disjoint sets could be any union of subsets of the type space. If we call the STR subset ΘS and the PER subset ΘP, we can consider the following strategy by Government:

$$\sigma_{G} = \begin{cases} \text{Accept } & \text{ if \textit{I} pursues STR}\\ \text{Accept } & \text{ if \textit{I} pursues PER} \end{cases}$$

Which will be a best response whenever the following conditions hold:

$${\int}_{{\Theta}_{P}} g_{P}(\theta)\pi_{P}(\theta) f(\theta)d\theta \geq 0$$
$${\int}_{{\Theta}_{S}} g_{S}(\theta)\pi_{S}(\theta) f(\theta)d\theta \geq 0$$

Thus a separating equilibrium can be constructed if the above conditions hold without relying on Lemma 1. This separating equilibrium does reveal information about the type of I to Government, but in a somewhat less easily interpretable fashion. Nonetheless, the equilibrium described will only hold if a sufficiently positively weighted distribution of types is screened to STR to overcome its relatively low chances of success compared to PER and Government’s preference for PER over STR in this variant of the model. □

Proof of Proposition 8

Consider the pooling conditions from Propositions 1 and 2 respectively.

$$\mathbb{E}[g(\theta)|AllPER] = {{\int}_{0}^{w}} g(\theta)\pi_{P}(\theta)f(\theta)d\theta \geq 0$$
$$\mathbb{E}[g(\theta)|AllSTR] = {{\int}_{0}^{w}} g(\theta)\pi_{S}(\theta)f(\theta)d\theta \geq 0$$

We have defined an upward shift in protectionist sentiment as a shift to g+(𝜃) such that g+(𝜃) ≥ g(𝜃),∀𝜃 ∈Θ, with some positive Lebesgue measure subset \({\Theta }^{\prime }\) such that \(g^{+}(\theta ^{\prime })>g(\theta ^{\prime }), \forall \theta ^{\prime } \in {\Theta }^{\prime }\). We can partition Θ into two sets: \({\Theta }^{\prime }\) and \({\Theta }^{\prime \prime }\), where \(g^{+}(\theta ^{\prime \prime }) =g(\theta ^{\prime \prime }), \forall \theta ^{\prime \prime } \in {\Theta }^{\prime \prime }\). Thus, for both pooling conditions, we can rewrite the relevant integrals, for either institution z as:

$$\mathbb{E}[g(\theta)|z] = \underbrace{{\int}_{{\Theta}^{\prime}} g(\theta^{\prime})\pi_{z}(\theta^{\prime})f(\theta^{\prime})d\theta^{\prime}}_{\alpha} + \underbrace{{\int}_{{\Theta}^{\prime\prime}} g(\theta^{\prime\prime})\pi_{z}(\theta^{\prime\prime})f(\theta^{\prime\prime})d\theta^{\prime\prime}}_{\beta}$$

Which we can compare to the following after a shift in protectionist sentiment:

$$\mathbb{E}[g^{+}(\theta)|z] = \underbrace{{\int}_{{\Theta}^{\prime}} g^{+}(\theta^{\prime})\pi_{z}(\theta^{\prime})f(\theta^{\prime})d\theta^{\prime}}_{A} + \underbrace{{\int}_{{\Theta}^{\prime\prime}} g^{+}(\theta^{\prime\prime})\pi_{z}(\theta^{\prime\prime})f(\theta^{\prime\prime})d\theta^{\prime\prime}}_{B}$$

Because \(g^{+}(\theta ^{\prime \prime })=g(\theta ^{\prime \prime }), \forall \theta ^{\prime \prime } \in {\Theta }^{\prime \prime }\), it must be the case that β = B. Similarly, since \(g^{+}(\theta ^{\prime })>g(\theta ^{\prime }), \forall \theta ^{\prime } \in {\Theta }^{\prime }\), it must be the case that A > α, if either is nonzero. Furthermore, since \({\Theta }^{\prime }\) has positive Lebesgue measure, at least one must be nonzero. Thus we have shown that:

$$\mathbb{E}[g^{+}(\theta)|z] > \mathbb{E}[g(\theta)|z]$$

Which means that the pooling conditions of Propositions 1 and 2 are more likely to be met after an upward shift in protectionist sentiment. □

Proof of Proposition 9

From the text, note that an institution-induced separating equilibrium is preferred to no institution whenever:

$$U_{G}(\text{Institution}) = {\int}_{\bar w}^{w} g(\theta) \pi_{S}(\theta) f(\theta)d\theta > {{\int}_{0}^{w}} g(\theta)f(\theta)d\theta = U_{G}(\text{No Institution})$$

Now, in a similar fashion to the Proof of Proposition 8, partition Θ into \({\Theta }^{\prime }\) and \({\Theta }^{\prime \prime }\). We want to see which side of the inequality changes more with a shift to g+(𝜃). Following Proposition 8, the integrals will be the same over \({\Theta }^{\prime \prime }\), thus we can compare:

$$ \begin{array}{@{}rcl@{}} {\Delta} U_{G}(\text{Institution}) &=& {\int}_{{\Theta}^{\prime}} g^{+}(\theta^{\prime}) \pi_{S}(\theta^{\prime}) f(\theta^{\prime})d\theta^{\prime} - {\int}_{\Theta '}g(\theta^{\prime})\pi_{S}(\theta^{\prime})f(\theta^{\prime})d\theta^{\prime}\\ &=& {\int}_{{\Theta}^{\prime}} [g^{+}(\theta^{\prime})-g(\theta^{\prime})] \pi_{S}(\theta^{\prime}) f(\theta^{\prime})d\theta^{\prime} \end{array} $$
$$ \begin{array}{@{}rcl@{}} {\Delta} U_{G}(\text{No Institution}) &=& {\int}_{{\Theta}^{\prime}} g^{+}(\theta^{\prime})f(\theta^{\prime})d\theta^{\prime} - {\int}_{{\Theta}^{\prime}} g(\theta^{\prime})f(\theta^{\prime})d\theta^{\prime}\\ &=& {\int}_{{\Theta}^{\prime}} [g^{+}(\theta^{\prime})-g(\theta^{\prime})]f(\theta^{\prime})d\theta^{\prime} \end{array} $$

Since \(\pi _{S}(\theta ^{\prime })\leq 1, \forall \theta ^{\prime } \in {\Theta }^{\prime }\), and since there must exist \(\theta ^{\prime } \in {\Theta }^{\prime }\) such that \(\pi _{S}(\theta ^{\prime })<1\), given that πS(⋅) is strictly monotonically increasing, ΔUG(No Institution) > ΔUG(Institution). Or, in words, an upwards shift in protectionist sentiment has a more significant positive impact on Government’s payoff in the “no institution” equilibrium than in a separating equilibrium obtained under an institution, and thus this upwards shift in sentiment makes the institution relatively less attractive. □

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Davis, J.S. Screening for losers: Trade institutions and information. Rev Int Organ (2021). https://doi.org/10.1007/s11558-020-09409-7

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Keywords

  • Trade
  • International institutions
  • Game theory
  • Trade remedies
  • Information
  • Politics
  • Interest groups
  • Screening
  • WTO