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Recurrent trade agreements and the value of external enforcement

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  • Klimenko, Mikhail
  • Ramey, Garey
  • Watson, Joel

Abstract

This paper presents a theory of dynamic trade agreements in which external institutions, such as the WTO, play a central role in supporting credible enforcement. In our model, countries engage in ongoing negotiations, and, as a consequence, cooperative agreements become unsustainable in the absence of external enforcement institutions. By using mechanisms such as delays in dispute resolution and direct penalties, enforcement institutions can restore incentives for cooperation, despite the lack of coercive power. The occurrence of costly trade disputes, and the feasibility of mechanisms such as escape clauses, depend on the degree to which enforcement institutions can verify, and condition on, events that may lead to trade disputes.

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File URL: http://www.sciencedirect.com/science/article/B6V6D-4PT7X9G-2/1/d9f268bd075c9041ecd5eb3513236e36
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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 74 (2008)
Issue (Month): 2 (March)
Pages: 475-499

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Handle: RePEc:eee:inecon:v:74:y:2008:i:2:p:475-499

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Web page: http://www.elsevier.com/locate/inca/505552

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Citations

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Cited by:
  1. Limao, Nuno & Saggi, Kamal, 2006. "Tariff retaliation versus financial compensation in the enforcement of international trade agreements," Policy Research Working Paper Series 3873, The World Bank.
  2. Richard Chisik, 2010. "Trade Disputes, Quality Choice, and Economic Integration," Working Papers 022, Ryerson University, Department of Economics.
  3. Meredith Crowley, 2006. "Why are safeguards needed in a trade agreement?," Working Paper Series WP-06-06, Federal Reserve Bank of Chicago.
  4. Goldlücke, Susanne & Kranz, Sebastian, 2012. "Infinitely repeated games with public monitoring and monetary transfers," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1191-1221.
  5. Sebastian Kranz, 2012. "Discounted Stochastic Games with Voluntary Transfers," Cowles Foundation Discussion Papers 1847, Cowles Foundation for Research in Economics, Yale University.
  6. Giovanni Maggi & Robert W. Staiger, 2008. "On the Role and Design of Dispute Settlement Procedures in International Trade Agreements," NBER Working Papers 14067, National Bureau of Economic Research, Inc.
  7. Joel Watson, 2013. "Contract and Game Theory: Basic Concepts for Settings with Finite Horizons," Games, MDPI, Open Access Journal, vol. 4(3), pages 457-496, August.
  8. Richard Chisik, 2010. "Limited Incremental Linking and Unlinked Trade Agreements," Working Papers 023, Ryerson University, Department of Economics.
  9. David A. Miller & Joel Watson, 2013. "A Theory of Disagreement in Repeated Games With Bargaining," Econometrica, Econometric Society, vol. 81(6), pages 2303-2350, November.

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