DP6037 Trade Agreements as Endogenously Incomplete Contracts

Author(s): Henrik Horn, Giovanni Maggi, Robert Staiger
Publication Date: January 2007
Keyword(s): endogenously incomplete contracts, GATT, trade agreement, WTO
JEL(s): D86, F13, K33
Programme Areas: International Trade and Regional Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=6037

We propose a model of trade agreements in which contracting is costly, and as a consequence the optimal agreement may be incomplete. In spite of its simplicity, the model yields rich predictions on the structure of the optimal trade agreement and how this depends on the fundamentals of the contracting environment. We argue that taking contracting costs explicitly into account can help explain a number of key features of real trade agreements.