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International agreements on product standards: an incomplete-contracting theory

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  • Pierpaolo Battigalli
  • Giovanni Maggi

Abstract

We propose a theory of international agreements on product standards. The key feature of the model is that agreements are viewed as incomplete contracts. In particular, these do not specify standards for products that may arise in the future. One potential remedy to contractual incompleteness is a dispute settlement procedure (DSP) that provides arbitration in states of the world that are not covered by the ex ante agreement. We identify conditions under which a DSP can provide ex-ante efficiency gains, and examine how these gains depend on the fundamentals of the problem. Another potential remedy to contractual incompleteness is given by rigid rules, i.e. rules that are not product-specific. We argue that the nondiscrimination rule is the only rule of this kind that increases ex ante efficiency for any probability distribution over potential products. Finally we show that, under relatively weak conditions, the optimal ex-ante agreement is structured in three parts: (i) a set of clauses that specify standards for existing products; (ii)a rigid nondiscrimination rule, and (iii) a dispute settlement procedure. Although the model focuses on the case of product standards, the analysis suggests a more general incomplete-contracting theory of trade agreements.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 229.

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Date of creation: 2003
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Handle: RePEc:igi:igierp:229

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Cited by:
  1. Robert W. Staiger & Alan O. Sykes, 2009. "International Trade and Domestic Regulation," NBER Working Papers 15541, National Bureau of Economic Research, Inc.
  2. Inaba, Masaru & Nutahara, Kengo, 2009. "The role of investment wedges in the Carlstrom-Fuerst economy and business cycle accounting," Economics Letters, Elsevier, Elsevier, vol. 105(3), pages 200-203, December.
  3. Horn, Henrik, 2006. "National Treatment in the GATT," Working Paper Series, Research Institute of Industrial Economics 657, Research Institute of Industrial Economics.
  4. JINJI Naoto, 2009. "An Economic Theory of the SPS Agreement," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 09033, Research Institute of Economy, Trade and Industry (RIETI).
  5. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2006. "Trade Agreements as Endogenously Incomplete Contracts," NBER Working Papers 12745, National Bureau of Economic Research, Inc.
  6. Sergei Guriev & Mikhail Klimenko, 2007. "Duration and Term Structure of Trade Agreements," Working Papers, Laboratory for Macroeconomic Analysis WP13_2007_09, Laboratory for Macroeconomic Analysis.
  7. 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.
  8. Costinot, Arnaud, 2008. "A Comparative Institutional Analysis of Agreements on Product Standards," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt09f6660d, Department of Economics, UC San Diego.

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