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Enforcing International Trade Agreements with Imperfect Private Monitoring

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  • Jee-Hyeong Park
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    Abstract

    To analyse the role that the World Trade Organization (WTO) plays in enforcing international trade agreements, this paper first explores what countries can achieve alone by characterizing optimal private trigger strategies (PTS) under which each country triggers a punishment phase by imposing an explicit tariff based on privately observed imperfect signals of the other country's concealed trade barriers. It identifies the condition under which countries can restrain the use of concealed barriers based on PTS and establishes that countries will not reduce the cooperative protection level to its minimum attainable level under the optimal PTS. This paper then considers third-party trigger strategies (TTS) under which the WTO allows each country to initiate a punishment phase based on the WTO's judgement about potential violations. By comparing the optimal PTS and optimal TTS, it demonstrates that the WTO facilitates a better cooperative equilibrium by changing the nature of punishment-triggering signals from private to public, which in turn enables countries to use a more efficient punishment, such as an asymmetric and a minimum punishment. Copyright 2011, Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/restud/rdq036
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    Bibliographic Info

    Article provided by Oxford University Press in its journal The Review of Economic Studies.

    Volume (Year): 78 (2011)
    Issue (Month): 3 ()
    Pages: 1102-1134

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    Handle: RePEc:oup:restud:v:78:y:2011:i:3:p:1102-1134

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    Cited by:
    1. Richard Chisik, 2010. "Trade Disputes, Quality Choice, and Economic Integration," Working Papers 022, Ryerson University, Department of Economics.
    2. Yuichi Yamamoto, 2012. "Individual Learning and Cooperation in Noisy Repeated Games," PIER Working Paper Archive 12-044, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    3. Yuichi Yamamoto, 2013. "Individual Learning and Cooperation in Noisy Repeated Games," PIER Working Paper Archive 13-038, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    4. Kara M. Reynolds & Chad P. Bown, 2014. "Trade Flows and Trade Disputes," Working Papers 2014-05, American University, Department of Economics.

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