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Optimal Design of Trade Agreements in the Presence of Renegotiation

Author

Listed:
  • Giovanni Maggi
  • Robert W. Staiger

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)

Suggested Citation

  • Giovanni Maggi & Robert W. Staiger, 2015. "Optimal Design of Trade Agreements in the Presence of Renegotiation," American Economic Journal: Microeconomics, American Economic Association, vol. 7(1), pages 109-143, February.
    • Handle: RePEc:aea:aejmic:v:7:y:2015:i:1:p:109-43
    Note: DOI: 10.1257/mic.20120232
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    Citations

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    Cited by:

    1. Mostafa Beshkar, 2014. "Arbitration and Renegotiation in Trade Agreements," Caepr Working Papers 2014-004, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    2. Mostafa Beshkar, 2016. "Arbitration and Renegotiation in Trade Agreements," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 32(3), pages 586-619.
    3. Beshkar, Mostafa & Bond, Eric W. & Rho, Youngwoo, 2015. "Tariff binding and overhang: Theory and evidence," Journal of International Economics, Elsevier, vol. 97(1), pages 1-13.
    4. Kohler, Wilhelm & Stähler, Frank, 2019. "The economics of investor protection: ISDS versus national treatment," Journal of International Economics, Elsevier, vol. 121(C).
    5. Crowley, M. A. & Exton, O. & Han, L., 2018. "Renegotiation of Trade Agreements and Firm Exporting Decisions: Evidence from the Impact of Brexit on UK Exports," Cambridge Working Papers in Economics 1839, Faculty of Economics, University of Cambridge.
    6. Bård Harstad, 2020. "Trade and Trees: How Trade Agreements Can Motivate Conservation Instead of Depletion," CESifo Working Paper Series 8569, CESifo.
    7. Toke S. Aidt & Facundo Albornoz & Esther Hauk, 2019. "Foreign in influence and domestic policy: A survey," Cambridge Working Papers in Economics 1928, Faculty of Economics, University of Cambridge.
    8. Nabin, Munirul H. & Sgro, Pasquale M., 2018. "Bilateral international agreement, cooperation and reneging," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 27-33.
    9. Mostafa Beshkar & Jee-Hyeong Park, 2017. "Dispute Settlement with Second-Order Uncertainty: The Case of International Trade Disputes," CAEPR Working Papers 2017-010, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    10. Frank Stähler, 2023. "An optimal investor-state dispute settlement mechanism," Journal of Economics, Springer, vol. 138(1), pages 1-16, January.
    11. Ngo Van Long & Martin Richardson & Frank Stähler, 2023. "Issue linkage versus ringfencing in international agreements," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(2), pages 489-516, April.
    12. Richardson, Martin & Stähler, Frank, 2019. "International agreements, economic sovereignty and exit," European Economic Review, Elsevier, vol. 120(C).
    13. Maggi, Giovanni & Staiger, Robert W., 2020. "Learning by ruling and trade disputes," Journal of International Economics, Elsevier, vol. 126(C).
    14. Toke S. Aidt & Facundo Albornoz & Esther Hauk, 2021. "Foreign Influence and Domestic Policy," Journal of Economic Literature, American Economic Association, vol. 59(2), pages 426-487, June.

    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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