American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Optimal Design of Trade Agreements in the Presence of Renegotiation
American Economic Journal: Microeconomics
vol. 7,
no. 1, February 2015
(pp. 109–43)
Abstract
We study the optimal design of trade agreements when governments can renegotiate after the resolution of uncertainty but compensation between them is inefficient. In equilibrium, renegotiation always results in trade liberalization, not protection. The optimal contract may be a "property rule" or a "liability rule". High uncertainty favors liability over property rules, while asymmetries in bargaining power favor property over liability rules. Moreover, optimal property rules are never renegotiated. With a cost of renegotiation, property rules are favored when this cost is higher, reversing a central conclusion of the law-and-economics literature. (JEL C78, D86, F13, F15, K12)Citation
Maggi, Giovanni, and Robert W. Staiger. 2015. "Optimal Design of Trade Agreements in the Presence of Renegotiation." American Economic Journal: Microeconomics, 7 (1): 109–43. DOI: 10.1257/mic.20120232Additional Materials
JEL Classification
- C78 Bargaining Theory; Matching Theory
- D86 Economics of Contract: Theory
- F13 Trade Policy; International Trade Organizations
- F15 Economic Integration
- K12 Contract Law
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