Bilateral Trade Agreements between Countries with Asymmetric Power: An Incomplete Contract Perspective

Marie-Françoise Calmette

Economia Internazionale / International Economics, 2004, vol. 57, issue 4, 407-428

Abstract: This article examines the economic relevance of incomplete contract theory in a better understanding of the process of bilateral trade agreements between countries with asymmetric power. Agreement is signed under incomplete information because future trade flows are unknown when the decreases in tariffs are decided. Using a principal-agent model, we show that the powerful country makes a take-it-or- leave-it offer to the weaker country which is able, under incomplete information and non verifiability, to extract a positive information rent from the agreement, by undervaluing its exports. We further show that the threat of retaliation ensures that the truthful first best agreement will be implemented.

JEL-codes: D82 F13 H21 (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ecoint:0121

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