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The Political Economy of Bilateralism and Multilateralism: Institutional Choice in Trade and Taxation


  • Rixen, Thomas
  • Rohlfing, Ingo


Trade relations are governed by the multilateral GATT, whereas the avoidance of international double taxation rests on a network of around 2000 bilateral treaties. Given the two regimes’ similar economic rationales this difference between bilateralism in international double tax avoidance and multilateralism in the trade regime poses an empirical puzzle. In this paper we develop an answer to this puzzle. Differentiating between different stages of international cooperation, we first describe the institutional form in the bargaining and agreement stages of cooperation. This description shows that the regimes are quite similar in the bargaining stage, both exhibiting a mix of bilateral and multilateral bargaining. However, while agreement is multilateral in the trade regime it is bilateral in taxation. Based on stylized institutional histories of both cases we develop simple game theoretic models incorporating domestic level considerations. Building on these models we then go on to explain the institutional choice between bilateral and multilateral cooperation. We show that state concerns for the distribution of benefits can be best achieved under bilateral bargaining in both regimes. However, in order to lower transaction costs there are also elements of multilateral bargaining. Agreement is multilateral in trade in order to overcome a free-rider problem that results from an interaction of concerns for distribution and enforcement. Since such a problem of free-riding does not exist in taxation, there is no need for binding multilateral agreement.

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  • Rixen, Thomas & Rohlfing, Ingo, 2005. "The Political Economy of Bilateralism and Multilateralism: Institutional Choice in Trade and Taxation," MPRA Paper 325, University Library of Munich, Germany, revised 2005.
  • Handle: RePEc:pra:mprapa:325

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    References listed on IDEAS

    1. Chisik, Richard & Davies, Ronald B., 2004. "Asymmetric FDI and tax-treaty bargaining: theory and evidence," Journal of Public Economics, Elsevier, vol. 88(6), pages 1119-1148, June.
    2. Ronald B. Davies, 2004. "Tax Treaties and Foreign Direct Investment: Potential versus Performance," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(6), pages 775-802, November.
    3. Richard Chisik & Ronald B. Davies, 2004. "Gradualism In Tax Treaties With Irreversible Foreign Direct Investment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(1), pages 113-139, February.
    4. Mansfield, Edward D. & Reinhardt, Eric, 2003. "Multilateral Determinants of Regionalism: The Effects of GATT/WTO on the Formation of Preferential Trading Arrangements," International Organization, Cambridge University Press, vol. 57(04), pages 829-862, September.
    5. Milner, Helen V. & Yoffie, David B., 1989. "Between free trade and protectionism: strategic trade policy and a theory of corporate trade demands," International Organization, Cambridge University Press, vol. 43(02), pages 239-272, March.
    6. Sebenius, James K., 1983. "Negotiation arithmetic: adding and subtracting issues and parties," International Organization, Cambridge University Press, vol. 37(02), pages 281-316, March.
    7. Fearon, James D., 1998. "Bargaining, Enforcement, and International Cooperation," International Organization, Cambridge University Press, vol. 52(02), pages 269-305, March.
    8. Dehejia, Vivek H. & Genschel, Philipp, 1998. "Tax competition in the European Union," MPIfG Discussion Paper 98/3, Max Planck Institute for the Study of Societies.
    9. 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, January.
    10. Koremenos, Barbara & Lipson, Charles & Snidal, Duncan, 2001. "The Rational Design of International Institutions," International Organization, Cambridge University Press, vol. 55(04), pages 761-799, September.
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    More about this item


    Theories of International Cooperation; International Trade; International Double Taxation; Bilateralism; Multilateralism;

    JEL classification:

    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations

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