A Rational Choice Model of Trade Policies: Incorporating Institutional Economics Into Traditional Game Theory

In this paper I develop a rational choice model which will provide some answers to the central question of the paper, under which conditions it becomes probable to observe free trade policies. This rational choice model constitutes a synthesis of a game theoretic and an institutional analysis of trade policies. The game theoretic analysis presented in the paper exemplifies that traditional game theory provides a good framework for a strategic analysis of trade policies. However, it is not without interpretive problems. In order to provide a correct interpretation of trade policies, it is necessary to gain a good understanding of the true nature of the players as well as the domestic framework and foundation of their trade policies. This leads us to the analysis of domestic institutions. It is shown that they define the true nature of the players and provide a framework for the trade game. When we combine the insights of the institutional analysis with traditional game theory, we add a new dimension to the strategic analysis of trade policies. It becomes possible to trace and explain the underlying causes for past and present trade policies and predict future trade policies with more accuracy. Furthermore, we can clarify the conditions under which it becomes probable to observe free trade policies and how to achieve this cooperative solution. The rational choice model presented in this paper makes an important contribution to the understanding of trade policies.