Optimal Design of Trade Agreements in the Presence of Renegotiation

Giovanni Maggi and Robert Staiger

American Economic Journal: Microeconomics, 2015, vol. 7, issue 1, 109-43

Abstract: We study the optimal design of trade agreements when governments can renegotiate after the resolution of uncertainty but compensation between them is inefficient. In equilibrium, renegotiation always results in trade liberalization, not protection. The optimal contract may be a "property rule" or a "liability rule". High uncertainty favors liability over property rules, while asymmetries in bargaining power favor property over liability rules. Moreover, optimal property rules are never renegotiated. With a cost of renegotiation, property rules are favored when this cost is higher, reversing a central conclusion of the law-and-economics literature. (JEL C78, D86, F13, F15, K12)

JEL-codes: C78 D86 F13 F15 K12 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/mic.20120232
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Citations: View citations in EconPapers (25)

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