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Networks of free trade agreements among heterogeneous countries

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  • MAULEON, Ana
  • SONG, Huasheng
  • VANNETELBOSCH, Vincent

Abstract

The paper examines the formation of free trade agreements as a network formation game. We consider a three-country model in which international trade occurs between economies with imperfectly competitive product markets. Labor markets can be unionized and non-unionized in each country. We show that if all countries are of the same type (all of them are either unionized or non-unionized), the global free trade network is both the unique pairwise stable network and the unique efficient network. If some countries are unionized while others are non-unionized, other networks apart from the global free trade network are likely to be pairwise stable. However, the efficient network is always the global free trade network. Thus, a conflict between stability and efficiency may occur. Moreover, starting from the network in which no country has signed a free trade agreement, all sequences of networks due to continuously profitable deviations do not lead (in most cases) to the global free trade network, even when global free trade is stable.

Suggested Citation

  • MAULEON, Ana & SONG, Huasheng & VANNETELBOSCH, Vincent, 2006. "Networks of free trade agreements among heterogeneous countries," LIDAM Discussion Papers CORE 2006053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2006053
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    Cited by:

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    3. Domenico Buccella, 2011. "Labor unions and economic integration: A review," Económica, Instituto de Investigaciones Económicas, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 0, pages 25-89, January-D.
    4. Teteryatnikova, Mariya, 2008. "R&D in the network of international trade: Multilateral versus regional trade agreements," WTO Staff Working Papers ERSD-2009-03, World Trade Organization (WTO), Economic Research and Statistics Division.

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    More about this item

    Keywords

    free-trade agreements; network formation game; unionization;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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