Working Paper: NBER ID: w15460
Authors: Giovanni Maggi; Robert W. 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: trade agreements; dispute settlement; property rights; liability rules; transaction costs
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 remedy (property rights vs. liability rules) (K13) | propensity of countries to settle disputes early (D74) |
| transaction costs are high (D23) | property rule is preferred (P14) |
| property rule is preferred (P14) | more early settlements (N91) |
| liability rule is optimal under conditions of high uncertainty (K13) | more early settlements are less likely (N91) |
| uncertainty over joint benefits of free trade decreases (F69) | optimal institutional arrangement shifts from liability rules to property rules (P14) |
| greater uncertainty about future joint benefits (D81) | early settlements are more likely (R23) |
| damages set by the Dispute Settlement Body (DSB) (F18) | whether disputes are resolved through negotiation or formal ruling (J52) |
| damages paid for breach in the WTO context (F13) | inefficient compensation mechanism (J33) |
| damages should be set lower than the level that makes the injured party whole (K13) | significant efficiency implications (D61) |