DP7527 Breach, Remedies and Dispute Settlement in Trade Agreements

Author(s): Giovanni Maggi, Robert W. Staiger
Publication Date: November 2009
Keyword(s): breach remedies, dispute settlement, international trade agreements
JEL(s): D02, D86, F13, K12, K33
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7527

We provide a simple but novel model of trade agreements that highlights the role of transaction costs, renegotiation and dispute settlement. The model allows us to characterize the appropriate remedy for breach and whether the agreement should be structured as a system of "property rights" or "liability rules." We then study how the optimal rules depend on the underlying economic and contracting environment. Our model also delivers predictions about the outcome of trade disputes, and in particular about the propensity of countries to settle early versus "fighting it out."