Document Type
Article
Publication Date
2-2015
Publication Title
American Economic Journal - Microeconomics
Department
Department of Economics
Abstract
We study the optimal design of trade agreements when governments can renegotiate after the resolution of uncertainty but compensation between them is inefficient. In equilibrium, renegotiation always results in trade liberalization, not protection. The optimal contract may be a "property rule" or a "liability rule". High uncertainty favors liability over property rules, while asymmetries in bargaining power favor property over liability rules. Moreover, optimal property rules are never renegotiated. With a cost of renegotiation, property rules are favored when this cost is higher, reversing a central conclusion of the law-and-economics literature. (JEL C78, D86, F13, F15, K12)
DOI
10.1257/mic.20120232
Dartmouth Digital Commons Citation
Maggi, Giovanni and Staiger, Robert W., "Optimal Design of Trade Agreements in the Presence of Renegotiation" (2015). Dartmouth Scholarship. 2372.
https://digitalcommons.dartmouth.edu/facoa/2372
