support for the prediction that the optimal tari¤ cap is higher, and thus the likelihood of binding overhang is greater, when importer market power is lower. To gain some intuition for their theoretical ...ndings, it is helpful to consider the extreme case of a small country. Since the tari¤ policy of a small country imposes no terms-of-trade externality on its trading partner, the optimal trade agreement would permit such a country to impose its unilaterally optimal trade policy for whatever preference shock it experiences. A high (i.e., unrestrictive) tari¤ cap achieves this goal. More generally, when a country has more market power in a sector, its tari¤ policy imposes a greater externality on its trading partner, and so a lower tari¤ cap, with an associated reduced frequency of binding overhang, is optimal. Using data on applied and bound tari¤s for WTO member countries, they then provide strong empirical support for this prediction.<sup>56</sup> Tari¤ caps and binding overhang have also received attention in other modeling frameworks. In a model with contracting costs, Horn, Maggi and Staiger (2010) compare a weak binding rule and a rigid tari¤ rule. The framework is di¤erent from that considered by Bagwell and Staiger (2005b) but interestingly points to a related set of insights as regards bindings and overhang. Horn, Maggi and Staiger (2010) show that a weak binding rule is preferred to a rigid tari¤ rule, since the former permits e¢ ciency-enhancing downward ‡exibility, and they also note that the weak binding rule is characterized by binding overhang. A di¤erent approach is pursued by Maggi and Rodriguez-Clare (2007). As we also discuss in Section 6.1, they analyze a model in which trade agreements address both commitment and terms-of-trade problems. In their model, binding overhang does not occur in equilibrium; however, the potential to apply a tari¤ below the bound level induces ex post lobbying that has the bene...cial e¤ect of diminishing an ex ante problem of excess investment.

The tari¤-cap theory described above establishes a rationale for tari¤ caps when governments have private information and contingent transfers are infeasible. As we argue next, in addition to providing an interpretation of tari¤ caps and binding overhang, this theory provides a foundation from which to understand contingent protection. A key idea is that contingent protection potentially may enhance e¢ ciency by “linking” tari¤ choices through time for a given government or across governments, and creating thereby some scope for imperfect contingent transfers. More generally, contingent protection provides a form of upward ‡exibility that in some cases may enhance e¢ ciency when certain shocks occur. At the same time, it also must be emphasized that tari¤ caps are a valuable means of “stabilizing”tari¤ commitments and diminishing the potential for “unwinding” tari¤ commitments.<sup>57</sup> The optimal rules for contingent protection thus re‡ect a delicate balance between maintaining reduced tari¤s in response to the terms-of-trade externality and providing some upward ‡exibility in light of various shocks that may confront governments.

Contingent protection such as safeguards and antidumping Bagwell and Staiger (2005b) explore a role for contingent protection when governments experience preference shocks that are

> 56 See Bacchetta and Piermartini (2011) for additional empirical evidence regarding tari¤ caps and binding overhang.

> 57 For further discussion of the importance of tari¤ stabilization, see Curzon (1965, Chapter 4). Focusing on India, Bown and Tovar (2011) provide empirical evidence that countries use antidumping and safeguard exceptions to unwind commitments to lower tari¤s in the presence of domestic political-economic pressure.

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