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Starting Small in Free Trade Agreements

  • Harun Onder

    ()

    (Department of Economics, Florida International University)

This paper analyzes the structure of cooperation between two large countries under one-sided incomplete information. Foreign government privately observes its likelihood of experiencing a political economy shock in each period. Home government’s prior belief about this likelihood is updated in a Bayesian fashion as the relationship continues. We show that the home government employs its privilege to design a contract so as to start with a few-goods-agreement, and increase the extent of cooperation gradually as its belief is favorably updated through periods. We also provide the conditions under which the home government makes the partner reveal its type in the beginning, or enables it to stay in a cooperative relationship without a complete revelation. As opposed to conventional approaches that relate gradualism with cost of liberalization, we show that asymmetric information provides a sufficient reason for gradualism to emerge.

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File URL: http://casgroup.fiu.edu/pages/docs/1569/1280267710_09-05.pdf
File Function: First version, 2009
Download Restriction: no

Paper provided by Florida International University, Department of Economics in its series Working Papers with number 0905.

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Length: 24 pages
Date of creation: Feb 2009
Date of revision:
Handle: RePEc:fiu:wpaper:0905
Contact details of provider: Postal: Miami, FL 33199
Phone: (305) 348-2316
Fax: (305) 348-1524
Web page: http://casgroup.fiu.edu/Economics/

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  1. Giovanni Maggi & Andres Rodriguez-Clare, 2005. "A Political-Economy Theory of Trade Agreements," NBER Working Papers 11716, National Bureau of Economic Research, Inc.
  2. Baldwin, Richard, 2006. "Multilateralising Regionalism: Spaghetti Bowls as Building Blocs on the Path to Global Free Trade," CEPR Discussion Papers 5775, C.E.P.R. Discussion Papers.
  3. Joel Watson, 1999. "Starting Small and Commitment," Cowles Foundation Discussion Papers 1217, Cowles Foundation for Research in Economics, Yale University.
  4. Chisik, Richard, 2003. "Gradualism in free trade agreements: a theoretical justification," Journal of International Economics, Elsevier, vol. 59(2), pages 367-397, March.
  5. Conconi, Paola & Perroni, Carlo, 2004. "The Economics of Special and Differential Trade Regimes," CEPR Discussion Papers 4508, C.E.P.R. Discussion Papers.
  6. Bond, Eric W & Park, Jee-Hyeong, 2002. "Gradualism in Trade Agreements with Asymmetric Countries," Review of Economic Studies, Wiley Blackwell, vol. 69(2), pages 379-406, April.
  7. Furusawa, Taiji & Lai, Edwin L. -C., 1999. "Adjustment costs and gradual trade liberalization," Journal of International Economics, Elsevier, vol. 49(2), pages 333-361, December.
  8. Richard Chisik, 2010. "Limited Incremental Linking and Unlinked Trade Agreements," Working Papers 023, Ryerson University, Department of Economics.
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