Working Paper: CEPR ID: DP721
Authors: Alessandra Casella
Abstract: The great majority of international contracts provide for arbitration in the event of dispute. Legal scholars argue that international arbitration is causing the development of a legal doctrine attuned to the needs of business and independent of national laws. This paper studies international arbitration as a prime example of private trade shaping international institutions. The provisions and the practice of international arbitration are reviewed, and a general equilibrium model of the relationship between the expansion of international trade and the adoption of arbitration is presented. The model focuses on the heterogeneity of economic agents in terms of their legal needs. It shows how arbitration alters the size and composition of markets, while at the same time responding to exogenous changes in trade. In addition, it shows how the legal services provided by the courts deteriorate in the presence of arbitration, predicting that the share of traders using arbitration should rise as markets expand. Overall, the model does remarkably well in generating results commonly discussed in the legal literature.
Keywords: international integration; arbitration; institutions
JEL Codes: F15; H41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| International trade expansion (F19) | Adoption of arbitration (K41) |
| Increased productivity (O49) | Expanded international market (F69) |
| Expanded international market (F69) | Higher incidence of arbitration usage (J52) |
| Existence of arbitration (J52) | Provision of legal services by national courts (K41) |
| Provision of legal services by national courts (K41) | Deterioration in quality of legal services (L84) |
| International trade expansion (F19) | Proportion of traders preferring arbitration (J52) |