# **5.2 Empirical evidence for bound tariffs with substantial overhang**

In this section I follow a modified version of Nicita, Olarreaga, and Silva (2013) to examine empirically the question of whether measures of importer market power are related to applied tariffs for the countries identified in Table 7 as having substantial tariff overhang, or an average of more than 15 percentage points between their tariff bindings and their applied MFN tariffs. In the estimation, I also condition on the country-product pairs that have 15 percentage points or more of tariff overhang as well.<sup>22</sup> The basic model that I estimate is again simply where if importing countries continue to exert market power over their applied import tariffs ( _τgc_<sup>_WTO−applied_</sup> ) for this subset of bound products over which there is substantial tariff overhang, I expect _γ_ 0 to be positive. The main difference from the approach described in the last section is not the model, it is simply the subsample of countries and products (those with bound tariffs and tariff overhang) over which the model is estimated.

Table 8 presents the results. The general finding confirms the Nicita, Olarreaga and Silva evidence for this particular subsample of countries that market power considerations are positively related to applied MFN tariff rates in 2013 for these products.

The first column of Table 8 is the baseline specification which indicates a positive and statistically significant relationship between the log of the inverse of the foreign export supply elasticity, given by ln(1 _/ωgc_<sup>_∗_)</sup><sup>_,_andthemeasureoftheappliedMFNtariffrate,givenbyln(1 +</sup><sup>_τ WTO_</sup> _gc_<sup>_−applied_</sup> ) _._ In column (2) I introduce importing country fixed effects, and in column (3) I utilize the high inverse elasticity indicator variable in lieu of the continuous measure. The results are robust to these different specifications.

The next three columns of Table 8 examine subsamples of these data. Column (4) focuses on where tariff overhang is the greatest by changing the threshold from 15 percentage points to 25 percentage points, thereby reducing the sample almost in half.<sup>23</sup> The size of the estimated impact of market power is even larger in the subsample of countries and products where tariff overhang is largest. Columns (5) and (6) split the original baseline sample in two depending on whether or not the products fall into agriculture. Interestingly, the potential influence of market power is not found in the agricultural product subsample of the data in column (6), though admittedly this is a much smaller sample of observations.

Finally, and as a last “consistency check” with expectations, the very last column of Table 8 presents estimates from the same model on a completely different subsample of data - i.e., the twelve

> 22That is, I drop from the sample all products within these 45 countries that have bound tariffs but applied MFN tariffs that are within 15 percentage points (or less) of the binding rate. Because I am therefore conditioning on a sample of countries and products that _only_ have tariff overhang, I do not need to include interaction terms a la Nicita, Olarreaga and Silva (2013) so as to thereby separate out the potential negative relationship between measures of import market power in the absence of such overhang (i.e, when the applied MFN tariff is equal to the binding rate).

> 23For the countries involved in this subsample, see again Table 7, and the bottom two thirds of the listed countries, beginning with Peru (26.1 percent).

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