Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 689: Trade Agreements as Endogenously Incomplete Contracts

Henrik Horn (), Giovanni Maggi and Rikard W. Staiger
Additional contact information
Henrik Horn: Research Institute of Industrial Economics, Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Giovanni Maggi: Princeton University
Rikard W. Staiger: Stanford University

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

JEL-codes: D86; F13; K33

50 pages, January 3, 2007

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