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Self-Enforcing Trade Agreements and Private Information

  • Kyle Bagwell

This paper considers self-enforcing trade agreements among privately informed governments. A trade agreement that uses weak bindings (i.e., maximal tariff levels) is shown to offer advantages relative to a trade agreement that uses strong bindings (i.e., precise tariff levels). Consistent with practice, the theory also predicts that governments sometimes apply tariffs that are strictly below their bound rates. When private information is persistent through time, an enforcement "ratchet effect" is identified: a government reveals that it is "weak," and thus that it is unlikely to retaliate in an effective manner, when it applies a low tariff. This effect suggests that a government with a low type may "pool" at an above-optimal tariff, in order to conceal weakness. It also suggests a new information-based theory of gradualism in trade agreements.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14812.

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Date of creation: Mar 2009
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Handle: RePEc:nbr:nberwo:14812
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  1. Christian Broda & N. Limao & D. Weinstein, 2006. "Optimal Tariffs: The Evidence," 2006 Meeting Papers 381, Society for Economic Dynamics.
  2. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2010. "Trade Agreements as Endogenously Incomplete Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 394-419, March.
  3. Kyle Bagwell & Robert W. Staiger, 1988. "A Theory of Managed Trade," NBER Working Papers 2756, National Bureau of Economic Research, Inc.
  4. Eric W. Bond & Jee-Hyeong Park, 2002. "Gradualism in Trade Agreements with Asymmetric Countries," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 379-406.
  5. Grossman, G.M. & Helpman, E., 1992. "Trade Wars and Trade Talks," Papers 163, Princeton, Woodrow Wilson School - Public and International Affairs.
  6. Susan Athey & Kyle Bagwell, 2004. "Collusion with Persistent Cost Shocks," Levine's Bibliography 122247000000000334, UCLA Department of Economics.
  7. Feenstra, Robert C & Lewis, Tracy R, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1287-307, November.
  8. Baldwin, Richard, 1987. "Politically realistic objective functions and trade policy PROFs and tariffs," Economics Letters, Elsevier, vol. 24(3), pages 287-290.
  9. Grossman, G.M. & Helpman, E., 1992. "Protection for Sale," Papers 162, Princeton, Woodrow Wilson School - Public and International Affairs.
  10. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers 658612000000000081, UCLA Department of Economics.
  11. Susan Athey & Kyle Bagwell, 1999. "Optimal Collusion with Private Information," Working papers 99-17, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. 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.
  13. Bagwell,K. & Staiger,R.W., 1998. "An economic theory of GATT," Working papers 15, Wisconsin Madison - Social Systems.
  14. MARTIN, Alberto & VERGOTE, Wouter, 2007. "On the role of retaliation in trade agreements," CORE Discussion Papers 2007089, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Bchir, Mohamed Hedi & Jean, Sebastien & Laborde, David, 2005. "Binding Overhang and Tariff-Cutting Formulas," Working Papers 18873, TRADEAG - Agricultural Trade Agreements.
  16. Lee, Gea M., 2007. "Trade agreements with domestic policies as disguised protection," Journal of International Economics, Elsevier, vol. 71(1), pages 241-259, March.
  17. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-75, September.
  18. Maggi, Giovanni & Rodriguez-Clare, Andres, 2005. "A Political-Economy Theory of Trade Agreements," CEPR Discussion Papers 5321, C.E.P.R. Discussion Papers.
  19. Kyle Bagwell & Robert W. Staiger, 1997. "Reciprocity, Non-discrimination and Preferential Agreements in the Multilateral Trading System," NBER Working Papers 5932, National Bureau of Economic Research, Inc.
  20. Michael Devereux, 1990. "Growth, Specialization, and Trade Liberalization," Working Papers 786, Queen's University, Department of Economics.
  21. Kyle Bagwell & Robert W. Staiger, 2004. "The Economics of the World Trading System," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262524341, June.
  22. Giovanni Maggi, 1999. "The Role of Multilateral Institutions in International Trade Cooperation," American Economic Review, American Economic Association, vol. 89(1), pages 190-214, March.
  23. Richard Chisik, 2010. "Gradualism in Free Trade Agreements: A Theoretical Justification," Working Papers 018, Ryerson University, Department of Economics.
  24. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
  25. Bagwell, Kyle & Sykes, Alan O., 2004. "Chile price band system and safeguard measures relating to certain agricultural products," World Trade Review, Cambridge University Press, vol. 3(03), pages 507-528, November.
  26. Aramendia Miguel & Ruiz Luis & Wen Quan, 2008. "Forgiving-Proof Equilibrium in Infinitely Repeated Games," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 8(1), pages 1-17, February.
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