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Trade Agreements, Bargaining and Economic Growth

Rebelo's two-sector endogenous growth model is embedded within a two-country international trade framework. The two countries bargain over a trade agreement that specifies: (i) the size of the foreign aid that the richer country gives to the poorer one; (ii) the terms of the international trade that takes place after the aid is given. Foreign aid is given not because of generosity, but because it improves the capital allocation across the world and thus raises total world production. This world production surplus enables the rich country to raise its equilibrium consumption and welfare beyond their no-aid levels. To ensure it, the rich country uses a trade agreement to condition the aid on favorable terms of trade.

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Paper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2010/2.

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Length: 30
Date of creation:
Date of revision: 30 May 2010
Publication status: forthcoming in Journal of Macroeconomics
Handle: RePEc:haf:huedwp:wp201002
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  1. Jason G. Cummins & Giovanni L. Violante, 2002. "Investment-Specific Technical Change in the US (1947-2000): Measurement and Macroeconomic Consequences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 243-284, April.
  2. Gabriel Felbermayr, 2004. "Specialization on a technologically atagnant aector need not be bad for growth," Economics working papers 2004-02, Department of Economics, Johannes Kepler University Linz, Austria.
  3. Chan, Kenneth S., 1988. "Trade negotiations in a Nash bargaining model," Journal of International Economics, Elsevier, vol. 25(3-4), pages 353-363, November.
  4. Robert Hunter Wade, 2003. "What strategies are viable for developing countries today? The World Trade Organization and the shrinking of ‘development space’," LSE Research Online Documents on Economics 28239, London School of Economics and Political Science, LSE Library.
  5. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
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  7. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
  8. Daniel Cohen & Pierre Jacquet & Helmut Reisen, 2006. "After Gleneagles: What Role for Loans in ODA?," OECD Development Centre Policy Briefs 31, OECD Publishing.
  9. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  10. Michael Devereux, 1990. "Growth, Specialization, and Trade Liberalization," Working Papers 786, Queen's University, Department of Economics.
  11. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  12. Akiko Suwa-Eisenmann & Thierry Verdier, 2007. "Aid and trade," Oxford Review of Economic Policy, Oxford University Press, vol. 23(3), pages 481-507, Autumn.
  13. Jeremy Bulow & Kenneth Rogoff, 2005. "Grants versus Loans for Development Banks," American Economic Review, American Economic Association, vol. 95(2), pages 393-397, May.
  14. Lahiri, Sajal & Raimondos-Moller, Pascalis & Wong, Kar-yiu & Woodland, Alan D., 2002. "Optimal foreign aid and tariffs," Journal of Development Economics, Elsevier, vol. 67(1), pages 79-99, February.
  15. Mayer, Wolfgang, 1981. "Theoretical Considerations on Negotiated Tariff Adjustments," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 135-53, March.
  16. Frank Ackerman, . "05-01 "The Shrinking Gains from Trade: A Critical Assessment of Doha Round Projections"," GDAE Working Papers 05-01, GDAE, Tufts University.
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