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The Political Economy of Bilateralism and Multilateralism: Institutional Choice in Trade and Taxation

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Author Info
Rixen, Thomas
Rohlfing, Ingo

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Abstract

Trade relations are governed by the multilateral GATT, whereas the avoidance of international double taxation rests on a network of around 2000 bilateral treaties. Given the two regimes’ similar economic rationales this difference between bilateralism in international double tax avoidance and multilateralism in the trade regime poses an empirical puzzle. In this paper we develop an answer to this puzzle. Differentiating between different stages of international cooperation, we first describe the institutional form in the bargaining and agreement stages of cooperation. This description shows that the regimes are quite similar in the bargaining stage, both exhibiting a mix of bilateral and multilateral bargaining. However, while agreement is multilateral in the trade regime it is bilateral in taxation. Based on stylized institutional histories of both cases we develop simple game theoretic models incorporating domestic level considerations. Building on these models we then go on to explain the institutional choice between bilateral and multilateral cooperation. We show that state concerns for the distribution of benefits can be best achieved under bilateral bargaining in both regimes. However, in order to lower transaction costs there are also elements of multilateral bargaining. Agreement is multilateral in trade in order to overcome a free-rider problem that results from an interaction of concerns for distribution and enforcement. Since such a problem of free-riding does not exist in taxation, there is no need for binding multilateral agreement.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 325.

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Date of creation: 2005
Date of revision: 2005
Handle: RePEc:pra:mprapa:325

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Related research
Keywords: Theories of International Cooperation International Trade International Double Taxation Bilateralism Multilateralism

Find related papers by JEL classification:
F59 - International Economics - - International Relations and International Political Economy - - - Other
F53 - International Economics - - International Relations and International Political Economy - - - International Agreements and Observance; International Organizations

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  1. Milner, Helen V & Yoffie, David B, 1989. "Between Free Trade and Protectionism: Strategic Trade Policy and a Theory of Corporate Trade Demands," International Organization, MIT Press, vol. 43(2), pages 239-72, Spring.
  2. Chisik, Richard & Davies, Ronald B., 2004. "Asymmetric FDI and tax-treaty bargaining: theory and evidence," Journal of Public Economics, Elsevier, vol. 88(6), pages 1119-1148, June. [Downloadable!] (restricted)
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  3. Fearon, James D, 1998. "Bargaining, Enforcement, and International Cooperation," International Organization, MIT Press, vol. 52(2), pages 269-305, Spring.
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  4. Richard Chisik & Ronald B. Davies, 2004. "Gradualism In Tax Treaties With Irreversible Foreign Direct Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 113-139, 02. [Downloadable!] (restricted)
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  5. Ronald B. Davies, 2004. "Tax Treaties and Foreign Direct Investment: Potential versus Performance," International Tax and Public Finance, Springer, vol. 11(6), pages 775-802, November. [Downloadable!]
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  6. Barbara Koremenos & Charles Lipson & Duncan Snidal, 2001. "The Rational Design of International Institutions," International Organization, MIT Press, vol. 55(4), pages 761-799, October. [Downloadable!] (restricted)
  7. Mansfield, Edward D. & Reinhardt, Eric, 2003. "Multilateral Determinants of Regionalism: The Effects of GATT/WTO on the Formation of Preferential Trading Arrangements," International Organization, Cambridge University Press, vol. 57(04), pages 829-862, October. [Downloadable!]
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