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Trade Agreements, Political Economy and Endogenously Incomplete Contracts

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  • Li, Na
  • Ker, Alan P.

Abstract

We develop a political economy model of trade agreements following along the line of Grossman and Helpman (1995a) yet incorporating contracting costs, uncertainty and multiple policy instruments. We show that rent-seeking efforts do not affect tariff rates as they are offset by the substitution effect of domestic production subsidies. Similar to Horn et al (2010), we find the coexistence of uncertainty and contracting costs make optimal trade agreements incomplete contracts. Our model helps explain differential treatment on subsidies, countervailing duties, and the national treatment principle - all key provisions of the current WTO agreement.

Suggested Citation

  • Li, Na & Ker, Alan P., 2011. "Trade Agreements, Political Economy and Endogenously Incomplete Contracts," Working Papers 116850, Canadian Agricultural Trade Policy Research Network.
    • Handle: RePEc:ags:catpwp:116850
    DOI: 10.22004/ag.econ.116850
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    References listed on IDEAS

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    1. Kaemfer, William H & Lowenberg, Anton D, 1988. "The Theory of International Economic Sanctions: A Public Choice Approach," American Economic Review, American Economic Association, vol. 78(4), pages 786-793, September.
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    3. Henrik Horn & Giovanni Maggi & Robert W. Staiger, 2010. "Trade Agreements as Endogenously Incomplete Contracts," American Economic Review, American Economic Association, vol. 100(1), pages 394-419, March.
    4. Mayer, Wolfgang & Riezman, Raymond G., 1987. "Endogenous choice of trade policy instruments," Journal of International Economics, Elsevier, vol. 23(3-4), pages 377-381, November.
    5. Kaempfer, William H & Lowenberg, Anton D, 1989. "The Theory of International Economic Sanctions--A Public Choice Approach: Reply," American Economic Review, American Economic Association, vol. 79(5), pages 1304-1306, December.
    6. Schleich, Joachim & Orden, David, 1996. "Efficient choice among domestic and trade policies in the Grossman-Helpman Interest-Group Model," Bulletins 7458, University of Minnesota, Economic Development Center.
    7. Levy, Philip I, 1997. "A Political-Economic Analysis of Free-Trade Agreements," American Economic Review, American Economic Association, vol. 87(4), pages 506-519, September.
    8. Henrik Horn, 2006. "National Treatment in the GATT," American Economic Review, American Economic Association, vol. 96(1), pages 394-404, March.
    9. Levy, Philip I., 1999. "Lobbying and international cooperation in tariff setting," Journal of International Economics, Elsevier, vol. 47(2), pages 345-370, April.
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    More about this item

    Keywords

    Agricultural and Food Policy; International Relations/Trade; Political Economy; Public Economics;
    All these keywords.

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