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Why are Trade Agreements Regional?

  • Ben Zissimos

    (Vanderbilt University)

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 arises giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, and through strategic interaction in tariff setting, regional trade agreements generate larger rent-shifting effects than non regional agreements, which countries use to coordinate on a unique equilibrium. Under naive best responses, regional agreements give way to free trade.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2007.67.

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Date of creation: Jun 2007
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Handle: RePEc:fem:femwpa:2007.67
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