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Bargaining in the International Trade Under Exchange Rate Uncertainty

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  • Donnefeld, Shabtai
  • Zilcha, Itzhak

Abstract

This paper studies the implications of various contracting alternatives between exporting and importing firms on the value of production and international transactions. Since contracts are usually determined when exchange rate is uncertain, we show that under some conditions renegotiating these initial trade contracts can be beneficial to both parties. In such Nash-type bargaining solutions the initial contract is the disagreement point. It is shown that when renegotiation is possible, the firm produces more and the expected export is higher. Our results have some implications to well-known results concerning vertical integration as well.
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Suggested Citation

  • Donnefeld, Shabtai & Zilcha, Itzhak, 1993. "Bargaining in the International Trade Under Exchange Rate Uncertainty," Foerder Institute for Economic Research Working Papers 275581, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275581
    DOI: 10.22004/ag.econ.275581
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    References listed on IDEAS

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    1. Donnenfeld, Shabtai & Zilcha, Itzhak, 1991. "Pricing of Exports and Exchange Rate Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 1009-1022, November.
    2. Baron, David P, 1976. "Fluctuating Exchange Rates and the Pricing of Exports," Economic Inquiry, Western Economic Association International, vol. 14(3), pages 425-438, September.
    3. Stephen P. Magee, 1974. "U.S. Import Prices in the Currency-Contract Period," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 5(1), pages 117-168.
    4. Peter B. Clark, 1973. "Uncertainty, Exchange Risk, And The Level Of International Trade," Economic Inquiry, Western Economic Association International, vol. 11(3), pages 302-313, September.
    5. Stephen P. Magee, 1973. "Currency Contracts, Pass-Through, and Devaluation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 303-325.
    6. Wood, Gavin A, 1991. "Valuation Effects, Currency Contract Impacts and the J-Curve: Empirical Estimates," Australian Economic Papers, Wiley Blackwell, vol. 30(56), pages 148-163, June.
    7. McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098.
    8. Cushman, David O., 1983. "The effects of real exchange rate risk on international trade," Journal of International Economics, Elsevier, vol. 15(1-2), pages 45-63, August.
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    Cited by:

    1. Ligthart, Jenny E. & Werner, Sebastian E.V., 2012. "Has the euro affected the choice of invoicing currency?," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1551-1573.
    2. Friberg, Richard & Wilander, Fredrik, 2007. "Price Setting Transactions and the Role of Denominating Currency in FX Markets," Working Paper Series 201, Sveriges Riksbank (Central Bank of Sweden).
    3. Friberg, Richard & Wilander, Fredrik, 2008. "The currency denomination of exports -- A questionnaire study," Journal of International Economics, Elsevier, vol. 75(1), pages 54-69, May.
    4. Friberg, Richard, 1996. "On the Role of Pricing Exports in a Third Currency," SSE/EFI Working Paper Series in Economics and Finance 128, Stockholm School of Economics.

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