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Endogenous coalition formation and free trade agreements

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  • Vi Cao
  • Haifeng Fu
  • X. Henry Wang

Abstract

This paper studies the endogenous formation of free trade agreements. There are four countries belonging to two types according to market demand and production technology. A unique strong Nash equilibrium exists for the coalition formation game. In equilibrium, two coalition structures may emerge: global free trade, wherein a single coalition encompassing all countries is established, or polarization, characterized by the formation of two symmetric agreements between the same type countries. The specific coalition structure that emerges in equilibrium depends on both the disparity in demand and the gap in unit cost of production between the two types of countries.

Suggested Citation

  • Vi Cao & Haifeng Fu & X. Henry Wang, 2024. "Endogenous coalition formation and free trade agreements," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 45(8), pages 5781-5810, December.
    • Handle: RePEc:wly:mgtdec:v:45:y:2024:i:8:p:5781-5810
    DOI: 10.1002/mde.4346
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