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Why are Trade Agreements Regional?

This paper shows how distance may be used to coordinate on a unique equilibrium in which trade agreements are regional. Trade agreement formation is modeled as coalition formation. In a standard trade model with no distance between countries a familiar problem of coordination failure occurs, giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, regional trade agreements generate larger rent-shifting effects than non-regional agreements. Countries use these effects to coordinate on a unique equilibrium.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 19 (2011)
Issue (Month): 1 (02)
Pages: 32-45

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Handle: RePEc:bla:reviec:v:19:y:2011:i:1:p:32-45
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