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The political economy of bilateralism and multilateralism: Institutional choice in international 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 regimesÂ’ 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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Paper provided by University of Bremen, Collaborative Research Center 597: Transformations of the State in its series TranState Working Papers with number 31.

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Date of creation: 2005
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Handle: RePEc:zbw:sfb597:31
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  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. Fearon, James D., 1998. "Bargaining, Enforcement, and International Cooperation," International Organization, Cambridge University Press, vol. 52(02), pages 269-305, March.
  3. Richard Chisik & Ronald B. Davies, 2010. "Gradualism in Tax Treaties with Irreversible Foreign Direct Investment," Working Papers 019, Ryerson University, Department of Economics.
  4. Ronald B. Davies, 2004. "Tax Treaties and Foreign Direct Investment: Potential versus Performance," International Tax and Public Finance, Springer, vol. 11(6), pages 775-802, November.
  5. 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.
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