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Starting Small in Free Trade Agreements

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Author Info
Harun Onder () (Department of Economics, Florida International University)

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Abstract

This paper analyzes the structure of cooperation between two large countries under one-sided incomplete information. Foreign government privately observes its likelihood of experiencing a political economy shock in each period. Home government’s prior belief about this likelihood is updated in a Bayesian fashion as the relationship continues. We show that the home government employs its privilege to design a contract so as to start with a few-goods-agreement, and increase the extent of cooperation gradually as its belief is favorably updated through periods. We also provide the conditions under which the home government makes the partner reveal its type in the beginning, or enables it to stay in a cooperative relationship without a complete revelation. As opposed to conventional approaches that relate gradualism with cost of liberalization, we show that asymmetric information provides a sufficient reason for gradualism to emerge.

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File URL: http://www.fiu.edu/orgs/economics/wp2009/09-05.pdf
File Format: application/pdf
File Function: First version, 2009
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Publisher Info
Paper provided by Florida International University, Department of Economics in its series Working Papers with number 0905.

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Length: 24 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:fiu:wpaper:0905

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Web page: http://www.fiu.edu/orgs/economics/
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Related research
Keywords: Gradualism; Free Trade Agreements; Asymmetric Information;

Find related papers by JEL classification:
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
F15 - International Economics - - Trade - - - Economic Integration
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
F53 - International Economics - - International Relations and International Political Economy - - - International Agreements and Observance; International Organizations

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Watson, Joel, 2002. "Starting Small and Commitment," Games and Economic Behavior, Elsevier, vol. 38(1), pages 176-199, January. [Downloadable!] (restricted)
    Other versions:
  2. Chisik, Richard, 2003. "Gradualism in free trade agreements: a theoretical justification," Journal of International Economics, Elsevier, vol. 59(2), pages 367-397, March. [Downloadable!] (restricted)
    Other versions:
  3. Conconi, Paola & Perroni, Carlo, 2004. "The Economics of Special and Differential Trade Regimes," CEPR Discussion Papers 4508, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Bond, Eric W & Park, Jee-Hyeong, 2002. "Gradualism in Trade Agreements with Asymmetric Countries," Review of Economic Studies, Blackwell Publishing, vol. 69(2), pages 379-406, April.
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This page was last updated on 2009-11-3.

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