Working Paper: NBER ID: w14067
Authors: Giovanni Maggi; Robert W. Staiger
Abstract: Formal economic analysis of trade agreements typically treats disputes as synonymous with concerns about enforcement. But in reality, most WTO disputes involve disagreements of interpretation concerning the agreement, or instances where the agreement is simply silent. And some have suggested that the WTO's Dispute Settlement Body (DSB) might serve a useful purpose by granting "exceptions" to rigid contractual obligations in some circumstances. In each of these three cases, the role played by the DSB amounts to "completing" various dimensions of an incomplete contract. Moreover, there is a debate among legal scholars on whether or not precedent-setting in DSB rulings may enhance the performance of the institution. All of this points to the importance of understanding the implications of the different possible degrees of activism in the role played by the DSB. In this paper we bring formal analysis to bear on this broad question. We characterize the choice of contractual form and DSB role that is optimal for governments under various contracting conditions. A novel feature of our approach is that it highlights the interaction between the design of the contract and the design of the dispute settlement procedure, and it views these as two components of a single over-arching institutional design problem.
Keywords: Dispute Settlement Body; International Trade Agreements; Contractual Incompleteness; Institutional Design
JEL Codes: D02; D78; D86; F13; K12; K33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| DSB rulings (L87) | enforcement of trade agreements (F13) |
| DSB rulings (L87) | interpretation of vague contract terms (D86) |
| DSB rulings (L87) | filling of gaps in contracts (D86) |
| DSB rulings (L87) | granting of exceptions to rigid contractual obligations (D86) |
| DSB activist role (O35) | efficient outcomes (D61) |
| accuracy of DSB rulings (L43) | first-best outcomes (H21) |
| accuracy of DSB rulings (L43) | equilibrium occurrence of disputes (C62) |
| DSB intervention (C69) | overall efficiency (D61) |
| precedent-setting in DSB rulings (L43) | frequency of disputes (J52) |
| accuracy of DSB rulings (L43) | optimal combination of contract design and DSB roles (D47) |
| accuracy of DSB rulings (L43) | discretion in contracts (D86) |
| accuracy of DSB rulings (L43) | rigidity in contracts (D86) |