Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2010:12: Does Hidden Information Make Trade Liberalization More Fragile?

Mathias Herzing ()
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Mathias Herzing: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: This paper focuses on the impact of hidden information on strategic interaction in the context of trade agreements. In the presence of informational asymmetry it is possible that a tradeoff between liberalization and sustainability of cooperation emerges. It is shown that it may be optimal to agree on a degree of liberalization associated with a strictly positive ex ante probability of deviation occurring. In that case, cooperation will break down in …finite time, and the optimal degree of liberalization cannot be applied indefinitely.

Keywords: Trade agreements; repeated games; asymmetric information; trade policy

JEL-codes: C72; C73; D82; F13

35 pages, June 24, 2010

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