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Forbearance in Optimal Multilateral Trade Agreements

  • Bowen, Renee

    (Stanford University)

I present a theory of optimal multilateral trade agreements with public political shocks. I first show that "forbearance"-- where one country withholds retaliation when its trading partner receives a shock-- is a feature of an optimal agreement. This provides a rationale for countries not acting on retaliatory rights granted under GATT. Second I show that there is a limit to forbearance allowable in a self-enforcing agreement. This limit is increasing in the number of countries in the agreement, increasing in the common discount factor, and increasing in the size of the export sector.

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Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 2085.

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Date of creation: Nov 2011
Date of revision:
Handle: RePEc:ecl:stabus:2085
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  1. Beshkar, Mostafa, 2010. "Optimal remedies in international trade agreements," European Economic Review, Elsevier, vol. 54(3), pages 455-466, April.
  2. Rosendorff, B. Peter & Milner, Helen V., 2001. "The Optimal Design of International Trade Institutions: Uncertainty and Escape," International Organization, Cambridge University Press, vol. 55(04), pages 829-857, September.
  3. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
  4. John Kennan & Raymond Riezman, 2013. "Do Big Countries Win Tariff Wars?," World Scientific Book Chapters, in: International Trade Agreements and Political Economy, chapter 4, pages 45-51 World Scientific Publishing Co. Pte. Ltd..
  5. Richard Chisik & Harun Onder, 2010. "Does Limited Punishment Limit the Scope for Cross-Retaliation?," Working Papers 025, Ryerson University, Department of Economics, revised Oct 2015.
  6. Constantinos Syropoulos, 2002. "Optimum Tariffs and Retaliation Revisited: How Country Size Matters," Review of Economic Studies, Oxford University Press, vol. 69(3), pages 707-727.
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