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Duration and Term Structure of Trade Agreements

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Author Info
Sergei Guriev () (New Economic School)
Mikhail Klimenko (New Economic School)

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Abstract

Why are some trade agreements are concluded for a limited period of time while others have the form of evergreen contracts supplemented with a clause requiring an advance termination notice? We employ the recent advances in contract theory to demonstrate that the time structure of the trade agreement is related to the nature of the goods traded and that of the trade-related investments. If the agreement concerns trade in homogenous goods, the fixed-term contract duration is more likely. The fixed-term agreement provides incentives for an initial investment in trade-related infrastructure but leaves the parties the flexibility to reconsider the need for further investment. If the trade agreement covers heterogenous goods, the investment risk is more diversified and the likelihood of overinvestment is lower. Hence the agreement is more likely to be evergreen (with an advance termination notice or an escape clause).

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Paper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number WP13_2007_09.

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Length: 36 pages
Date of creation: Jan 2007
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Handle: RePEc:cas:wpaper:wp13_2007_09

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  1. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2006. "Trade Agreements as Endogenously Incomplete Contracts," NBER Working Papers 12745, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Eric W. Bond, 2006. "Transportation Infrastructure Investments And Trade Liberalization," The Japanese Economic Review, Japanese Economic Association, vol. 57(4), pages 483-500. [Downloadable!] (restricted)
  3. Kyle Bagwell & Robert W. Staiger, 2004. "The Economics of the World Trading System," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524341.
  4. McLaren, John, 1997. "Size, Sunk Costs, and Judge Bowker's Objection to Free Trade," American Economic Review, American Economic Association, vol. 87(3), pages 400-420, June. [Downloadable!] (restricted)
  5. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September. [Downloadable!] (restricted)
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  6. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
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  7. Bagwell, Kyle & Staiger, Robert W, 1990. "A Theory of Managed Trade," American Economic Review, American Economic Association, vol. 80(4), pages 779-95, September. [Downloadable!] (restricted)
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  8. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October. [Downloadable!] (restricted)
  9. Sergei Guriev & Dmitriy Kvasov, 2005. "Contracting on Time," American Economic Review, American Economic Association, vol. 95(5), pages 1369-1385, December. [Downloadable!]
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  10. Mikhail Klimenko & Garey Ramey & Joel Watson, 2001. "Recurrent Trade Agreements and the Value of External Enforcement," University of California at San Diego, Economics Working Paper Series 2001-01, Department of Economics, UC San Diego. [Downloadable!]
  11. Kyle Bagwell & Robert W. Staiger, 2005. "Enforcement, Private Political Pressure and the Gatt/Wto Escape Clause," Discussion Papers 0405-13, Columbia University, Department of Economics. [Downloadable!]
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  12. Pierpaolo Battigalli & Giovanni Maggi, 2003. "International agreements on product standards: an incomplete-contracting theory," Working Papers 229, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  13. Henrik Horn, 2006. "National Treatment in the GATT," American Economic Review, American Economic Association, vol. 96(1), pages 394-404, March. [Downloadable!]
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  14. Harris, Milton & Holmstrom, Bengt, 1987. "On the Duration of Agreements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 389-406, June. [Downloadable!] (restricted)
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This page was last updated on 2009-11-25.

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