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A note on bilateral trade agreements in the presence of irreversible investment and deferred negotiations

Matthew Cole (), M. Ryan Haley () and Aaron Lowen ()
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M. Ryan Haley: University of Wisconsin - Oshkosh

Economics Bulletin, 2008, vol. 6, issue 34, 1-10

Abstract: A common result in the trade literature is that a small country will realize gains from a bilateral free trade agreement with a large country. McLaren (1997) casts aspersions on this traditional belief by demonstrating that irreversible investment in the small country, with the possibility of re-negotiation by the large country, can actually make the small country prefer autarky to free trade. In this note, we identify a middle ground where the small country can realize above-autarky utility by only partially specializing (relative to the free-trade level of specialization) in export production this improvement occurs even in the presence of irreversible investment and deferred negotiations.

Keywords: irreversible; investment (search for similar items in EconPapers)
JEL-codes: F1 (search for similar items in EconPapers)
Date: 2008-08-26
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