Optimal Design of Trade Agreements in the Presence of Renegotiation

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&q...

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Bibliographic Details
Published inAmerican economic journal. Microeconomics Vol. 7; no. 1; pp. 109 - 143
Main Authors Maggi, Giovanni, Staiger, Robert W.
Format Journal Article
LanguageEnglish
Published Pittsburgh American Economic Association 01.02.2015
Subjects
Analysis
Bargaining
Bargaining power
Compensation
Contracts
Costs
Deadweight loss
Design optimization
Economic theory
Economics
Equilibrium
Exporters
Financial liabilities
Free trade
Government
Importers
International agreements
International trade
Law
Liability
Microeconomics
Political economy
Politics
Studies
Tariffs
Trade agreements
Trade liberalization
Trade negotiation
Trade policy
Transaction costs
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Summary: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.
ISSN:1945-7669
1945-7685
DOI:10.1257/mic.20120232