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World Integration, Competitive and Bargaining Regimes Switch: an Exploration

Listed author(s):
  • Joshua Aizenman

The purpose of this paper is to study the role of an endogenous switch from a competitive to a bargaining international equilibrium. We consider two trading blocks, which can engage in a free-market determined trade, or a bargaining dictated trade. Bargaining can be called for by either pany, and it may involve a fixed real cost. We propose a framework in order to deal with these issues. We apply such a framework to a symmetric global environment, where the bargaining equilibrium is shown to offer an international diversification of the countryspecific shocks, whereas the competitive equilibrium retains the country specific nature of the shocks. The degree of trade dependency is shown to determine the risk diversification achieved via the bargaining process, the frequency of bargaining, and the volume of trade. An increase in the relative importance of the trade dependent activities is associated with greater international diversification of country-specific shocks, and with a greater frequency of bargaining. We derive the optimal investment -- less costly bargaining will move us towards a comer solution, where trade dependency and local shock diversification are maximized. With positive bargaining costs, we will observe an internal solution with smaller diversification of local shocks. In such an environment the choice of optimal trade dependency balances at the margin the expected diversification against the costs of bargaining.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3103.

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Date of creation: Sep 1989
Publication status: published as Canadian Journal of Economics, May 1994, pp. 459-483
Handle: RePEc:nbr:nberwo:3103
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  1. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  2. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
  3. Frenkel, Jacob A & Razin, Assaf, 1986. "Fiscal Policies in the World Economy," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 564-594, June.
  4. R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.
  5. Ronald W. Jones & Douglas D. Purvis, 1981. "International Differences in Response to Common External Shocks: The Role of Purchasing Power Parity," Working Papers 419, Queen's University, Department of Economics.
  6. Alvin E Roth, 2008. "Axiomatic Models of Bargaining," Levine's Working Paper Archive 122247000000002376, David K. Levine.
  7. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
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