Limits of the WTO as a Self-Enforcing Institution
AbstractIs there a limit to trade cooperation that the WTO can facilitate? In this paper I present a theory of the WTO in which the WTO is an equilibrium out- come of multiple bilateral repeated prisoners' dilemma games among countries. The equilibrium mimics an important feature of the WTO's Dispute Settle- ment Mechanism (DSM) - trading partners withhold retaliation during the DSM process. I call this property of the DSM forbearance. I show that when a sufficient number of countries participate in multilateral sanctions under the WTO, the threat of these sanctions provides incentives to allow forbearance (i.e. use the DSM). This causes countries to obtain outcomes that improve joint welfare. I also show that there are limits to forbearance that can be sustained by this mechanism - the fraction of simultaneous deviations against a single country that can be part of an equilibrium approaches a finite number as the number of countries participating in multilateral punishments becomes arbitrarily large. The results provide a theoretical basis for the DSM to offer prospective punishments rather than retroactive punishments and suggests a critical role for renegotiation.
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Bibliographic InfoPaper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2071.
Date of creation: Nov 2010
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Find related papers by JEL classification:
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances
- F10 - International Economics - - Trade - - - General
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- NEP-ALL-2011-02-05 (All new papers)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Using the WTO to overcome a prisoner's dilemma
by Economic Logician in Economic Logic on 2011-03-10 15:27:00
- Dluhosch, Barbara & Horgos, Daniel, 2012.
"(When) Does Tit-for-Tat Diplomay in Trade Policy Pay Off?,"
116/2012, Helmut Schmidt University, Hamburg.
- Barbara Dluhosch & Daniel Horgos, 2013. "(When) Does Tit-for-tat Diplomacy in Trade Policy Pay Off?," The World Economy, Wiley Blackwell, vol. 36(2), pages 155-179, 02.
- Barbara Dluhosch & Daniel Horgos, 2012. "(When) Does Tit-for-Tat Diplomacy in Trade Policy Pay Off?," FIW Working Paper series 085, FIW.
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