Scandinavian Working Papers in Economics
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Research Institute of Industrial Economics (IFN) Working Paper Series

No 689:
Trade Agreements as Endogenously Incomplete Contracts

Henrik Horn (), Giovanni Maggi and Rikard W. Staiger

Abstract: We propose a model of trade agreements in which contracting is costly, and as a consequence the optimal agreement may be incomplete. Inspite of its simplicity, the model yields rich predictions on the structure of the optimal trade agreement and how this depends on the fundamentals of the contracting environment. We argue that taking contracting costs explicitly into account can help explain a number of key features of real trade agreements.

Keywords: Trade Agreement; WTO; GATT; Endogenously Incomplete Contracts; (follow links to similar papers)

JEL-Codes: D86; F13; K33; (follow links to similar papers)

50 pages, January 3, 2007

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