Working Paper: CEPR ID: DP7527
Authors: Giovanni Maggi; Robert Staiger
Abstract: We provide a simple but novel model of trade agreements that highlights the role of transaction costs, renegotiation and dispute settlement. The model allows us to characterize the appropriate remedy for breach and whether the agreement should be structured as a system of "property rights" or "liability rules." We then study how the optimal rules depend on the underlying economic and contracting environment. Our model also delivers predictions about the outcome of trade disputes, and in particular about the propensity of countries to settle early versus "fighting it out."
Keywords: Breach remedies; Dispute settlement; International trade agreements
JEL Codes: D02; D86; F13; K12; K33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| type of breach remedy (property rights) (K11) | likelihood of early dispute settlement (J52) |
| type of breach remedy (liability rules) (K13) | likelihood of early dispute settlement (J52) |
| ex-ante uncertainty is low (D84) | type of breach remedy (property rule) (K11) |
| ex-ante uncertainty is high (D84) | type of breach remedy (liability rule) (K13) |
| transaction costs (D23) | type of breach remedy (property rules) (K11) |
| type of breach remedy (property rules) (K11) | probability of early settlements (J26) |
| type of breach remedy (liability rules) (K13) | probability of early settlements (J26) |
| accuracy of DSB rulings improves (C52) | type of breach remedy (shift from liability to property rules) (K11) |
| type of breach remedy (shift from liability to property rules) (K11) | settlement dynamics (R23) |