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Pareto‐optimal Delegation in Customs Unions

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  • Mark Melatos
  • Alan D. Woodland

Abstract

Customs unions constitute agreements to engage in free intra‐union trade and to levy common external tariffs on trade with nonmembers. Existing theoretical models do not agree on how the common external tariffs are chosen. In this paper, a model of customs union formation is developed in which the Pareto principle and the assumption of unanimity are used to construct a mechanism for the choice of common external tariffs. The model is structured as a three‐stage game in which union members select common external tariffs yielding utility outcomes that are Pareto optimal and dominate the standalone alternative. Numerical examples demonstrate the wide range in the nature of these outcomes. Our results are discussed in relation to the delegation principle developed by Gatsios and Karp and to modeling approaches reported in the customs union literature. The paper emphasizes the importance of modeling the formation of the customs union agreement.

Suggested Citation

  • Mark Melatos & Alan D. Woodland, 2007. "Pareto‐optimal Delegation in Customs Unions," Review of International Economics, Wiley Blackwell, vol. 15(3), pages 441-461, August.
    • Handle: RePEc:bla:reviec:v:15:y:2007:i:3:p:441-461
    DOI: 10.1111/j.1467-9396.2007.00686.x
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    1. Melatos, Mark & Woodland, Alan, 2007. "Endogenous trade bloc formation in an asymmetric world," European Economic Review, Elsevier, vol. 51(4), pages 901-924, May.
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    Cited by:

    1. James Lake, 2019. "Dynamic formation of preferential trade agreements: The role of flexibility," Canadian Journal of Economics, Canadian Economics Association, vol. 52(1), pages 132-177, February.
    2. Raimondos-Moller, Pascalis & Woodland, Alan D., 2006. "Non-preferential trading clubs," Journal of International Economics, Elsevier, vol. 68(1), pages 79-91, January.
    3. Appelbaum, Elie & Melatos, Mark, 2024. "Preferential trade agreements as insurance," Journal of International Money and Finance, Elsevier, vol. 148(C).
    4. Melatos, Mark & Woodland, Alan, 2007. "Endogenous trade bloc formation in an asymmetric world," European Economic Review, Elsevier, vol. 51(4), pages 901-924, May.
    5. repec:bla:reviec:v:17:y:2009:i:si:p:292-303 is not listed on IDEAS

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