Working Paper: NBER ID: w12745
Authors: Henrik Horn; Giovanni Maggi; Robert W. Staiger
Abstract: We propose a model of trade agreements in which contracting is costly, and as a consequence the optimal agreement may be incomplete. In spite of its simplicity, the model yields rich predictions on the structure of the optimal trade agreement and how this depends on the fundamentals of the contracting environment. We argue that taking contracting costs explicitly into account can help explain a number of key features of real trade agreements.
Keywords: Trade Agreements; Contracting Costs; Incomplete Contracts
JEL Codes: D02; F1; F13; F15; F51; F53; F59
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Contracting costs (M55) | Incomplete agreements (D86) |
| Contracting costs (M55) | Rigidity of agreements (L14) |
| Contracting costs (M55) | Discretion in policy instruments (E60) |
| Contracting costs (M55) | Complexity of agreements (C78) |
| Uncertainty about import demand (D89) | Optimal structure of agreements (L14) |
| Optimal agreements (C78) | Discretion on domestic policy instruments (E60) |
| Optimal agreements (C78) | Treatment of import taxes (F10) |