Duration and Term Structure of Trade Agreements
38 Pages Posted: 4 Feb 2009 Last revised: 27 Jul 2010
Date Written: July 21, 2009
Abstract
Why are some trade agreements concluded for a limited period of time while others have the form of evergreen contracts supplemented with an advance termination notice clause? We use a dynamic incomplete contracting model to demonstrate that the time structure of the trade agreement is related to the nature of the underlying trade-related investments (or other types of irreversible resource adjustments). If these investments are lumpy and specialized to trade in a particular homogeneous good, the agreements with the fixed term of duration are more likely. The fixed-term agreement provides incentives for the initial investment but leaves the parties the flexibility to revisit the need for future investment by resorting to renegotiation. If the agreement covers trade in goods requiring incremental investments with spillovers of the investment benefits across industries, the risk of overinvestment is more diversified. Therefore, the parties are more likely to choose an evergreen agreement (with an advance termination notice or an escape clause). We show that these predictions are consistent with the econometric evidence on the trade agreements to which the U.S. is a party.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
National Treatment in the GATT
By Henrik Horn
-
Trade Agreements as Endogenously Incomplete Contracts
By Henrik Horn, Giovanni Maggi, ...
-
Trade Agreements as Endogenously Incomplete Contracts
By Henrik Horn, Giovanni Maggi, ...
-
International Agreements on Product Standards: An Incomplete-Contracting Theory
-
International Agreements on Product Standard: An Incomplete Contracting Theory
-
Self-Enforcing Trade Agreements and Private Information
By Kyle Bagwell
-
International Trade and Domestic Regulation
By Robert W. Staiger and Alan Sykes