Endogenous Free Trade Agreements and International R&D Networks

Tat Thanh Tran and Vasileios Zikos

Manchester School, 2018, vol. 86, issue 5, 641-664

Abstract: In this paper, we develop a network formation game in order to study how free trade agreements among countries and R&D networks among firms emerge in equilibrium. Prior research showed that free trade agreements discourage the formation of international R&D networks under the assumption that trade tariffs are exogenous. In contrast, we allow for endogenous trade tariffs, and show that free trade agreements promote R&D collaboration between firms. In terms of efficiency, we find that although countries can achieve an outcome that is socially desirable, the number of R&D collaborations between firms is likely to be excessive from a social viewpoint.

Date: 2018
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