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Abstract:
We develop a competitive model of trade between countries with similar aggregate factor endowments. The trade pattern reflects differences in the distribution of talent across the labor forces of the two countries. The country with a relatively homogenous population exports the good produced by a technology with complementarities between tasks. The country with a more diverse work force exports the good for which individual success is more important. Imperfect observabilitiy of talent strengthens the forces of comparative advantage. Finally, we examine an aspect of education policy concerning the spread of human capital across the student population.

Abstract:
We develop a competitive model of trade between countries with similar aggregate factor endowments. The trade pattern reflects differences in the distribution of talent across the labor forces of the two countries. The country with a relatively homogenous population exports the good produced by a technology with complementarities between tasks. The country with a more diverse work force exports the good for which individual success is more important. Imperfect observabilitiy of talent strengthens the forces of comparative advantage. Finally, we examine an aspect of education policy concerning the spread of human capital across the student population.

Abstract:
We propose a theory of international agreements on product standards. The key feature of the model is that agreements are viewed as incomplete contracts. In particular, these do not specify standards for products that may arise in the future. One potential remedy to contractual incompleteness is a dispute settlement procedure (DSP) that provides arbitration in states of the world that are not covered by the ex ante agreement. We identify conditions under which a DSP can provide ex-ante efficiency gains, and examine how these gains depend on the fundamentals of the problem. Another potential remedy to contractual incompleteness is given by rigid rules, i.e. rules that are not product-specific. We argue that the nondiscrimination rule is the only rule of this kind that increases ex ante efficiency for any probability distribution over potential products. Finally we show that, under relatively weak conditions, the optimal ex-ante agreement is structured in three parts: (i) a set of clauses that specify standards for existing products; (ii) a rigid nondiscrimination rule, and (iii) a dispute settlement procedure. Although the model focuses on the case of product standards, the analysis suggests a more general incomplete-contracting theory of trade agreements.

Trade Agreements, Standards, Incomplete Contracts, Dispute Settlement Procedure, Nondiscrimination

Abstract:
We examine a model of contracting where parties interact repeatedly and can contractat any point in time, but writing enforceable contracts is costly. A contract can describe contingencies and actions at a more or less detailed level, and the cost of writing a contract is proportional to the amount of detail. We consider both formal (externallyenforced) and informal (self-enforcing) contracts. The presence of writing costs has important implications both for the optimal structure of formal contracts, particularly the tradeoff between contingent and spot contracts, and for the interaction between formal and informal contracting. Our model sheds light on these implications and generates a rich set of predictions about the determinants of the optimal mode of contracting.

Abstract:
We examine a model of contracting where parties interact repeatedly and can contract at any point in time, but writing enforceable contracts is costly. A contract can describe contingencies and actions at a more or less detailed level, and the cost of writing a contract is proportional to the amount of detail. We consider both formal (externally enforced) and informal (self-enforcing) contracts. The presence of writing costs has important implications both for the optimal structure of formal contracts, particularly the trade-off between contingent and spot contracts, and for the interaction between formal and informal contracting. Our model sheds light on these implications and generates a rich set of predictions about the determinants of the optimal mode of contracting.

Writing costs, contingent vs spot contracting, formal vs informal contracts

Abstract:
We develop a model where trade agreements - in addition to correcting terms-of-trade externalities - help governments to commit vis-a-vis domestic industrial lobbies. We explore how trade liberalization is affected by the characteristics of the political environment, such as the degree to which governments are politically motivated and the influence of lobbies during the negotiation of the agreement. We find that governments may prefer to commit to tariff ceilings, rather than exact tariff levels. We also find that trade liberalization is deeper when capital is more mobile across sectors. In a dynamic extension of the model, the optimal agreement entails an immediate slashing of tariffs followed by a phase of gradual trade liberalization. In the gradual phase, the speed of liberalization is higher when capital is more mobile.

Trade agreements, lobbying, domestic commitment

Abstract:
This paper presents a theory of trade agreements where "politics" play an central role. This stands in contrast with the standard theory, where even politically-motivated governments sign trade agreements only to deal with terms-of-trade externalities. We develop a model where governments may be motivated to sign a trade agreement both by the presence of standard terms-of-trade externalities and by the desire to commit vis-a-vis domestic industrial lobbies. The model is rich in implications. In particular, it predicts that trade agreements result in deeper trade liberalization when governments are more politically motivated (provided capital mobility is sufficiently high) and when capital can move more freely across sectors. Also, governments tend to prefer a commitment in the form of tariff ceilings rather than exact tariff levels. In a fully dynamic specification of the model, trade liberalization occurs in two stages: an immediate slashing of tariffs and a subsequent gradual reduction of tariffs. The immediate tariff cut is a reflection of the terms-of-trade motive for the agreement, while the domestic-commitment motive is reflected in the gradual phase of trade liberalization. Finally, the speed of trade liberalization is higher when capital is more mobile across sectors.

Abstract:
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."

breach remedies, dispute settlement, international trade agreements

Abstract:
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."

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Abstract:
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."

International trade agreements, Breach remedies, Dispute settlement

Abstract:
A prominent model in the recent political-economy literature on trade policy is Grossman and Helpman's (1994) Protection for Sale' model. This model yields clear predictions for the cross-sectional structure of trade protection. The objective of our" paper is to check whether the predictions of the Grossman-Helpman model are consistent with the data and, if the model finds support, to estimate its two key structural parameters: the government's valuation of welfare relative to contributions, and the fraction of the voting population represented by a lobby. We find that the pattern of protection in the U.S. in 1983 is consistent with the basic predictions of the model. Our estimate of the government's valuation of welfare relative to contributions is surprisingly high; the weight of welfare in the government's objective function is estimated to be between 50 and 88 times the weight of contributions.

Abstract:
The prevalence of shirking within a large Italian bank appears to be characterized by significant regional differentials. In particular, absenteeism and misconduct episodes are substantially more prevalent in the south. We consider a number of potential explanations for this fact: different individual backgrounds; group-interaction effects; sorting of workers across regions; differences in local attributes; different hiring policies and discrimination against southern workers. Our analysis suggests that individual backgrounds, group-interaction effects and sorting effects contribute to explain the north-south shirking differential. None of the other explanations appears to be of first-order importance.

Abstract:
In this paper we reconsider a key empirical prediction generated by an important class of political-economy models of trade policy, namely that trade protection should be higher in sectors characterized by lower import penetration (we call this the little support for this prediction). In this paper we argue that the standard prediction depends critically on the assumptions that trade taxes are the only policy instruments and that the government has access to non-distortionary taxation. We analyze a model in which the government can use quotas and VERs in addition to trade taxes and raising public funds may be costly. Under a simple sufficient condition, our model predicts that the protection level increases with import penetration, both in sectors that are protected with tariffs and in sectors that are protected with quantitative restrictions.

Abstract:
Some international organizations are governed by unanimity rule, some others by a majority system. Still others have moved from one system to the other over time. The existing voting models, which generally assume that decisions made by voting are perfectly enforceable, have a difficult time explaining the observed variation in governance mode, and in particular the widespread occurrence of the unanimity system. We present a model whose main departure from standard voting models is that there is no external enforcement mechanism: each country is sovereign and cannot be forced to follow the collective decision, or in other words, the voting system must be self-enforcing. The model yields unanimity as the optimal system for a wide range of parameters, and delivers rich predictions on the variation in the mode of governance, both across organizations and over time.

Abstract:
We propose a theory of international agreements on product standards. The key feature of the model is that agreements are viewed as incomplete contracts. In particular, these do not specify standards for products that may arise in the future. One potential remedy to contractual incompleteness is a dispute settlement procedure (DSP) that provides arbitration in states of the world that are not covered by the ex ante agreement. We identify conditions under which a DSP can provide ex-ante efficiency gains, and examine how these gains depend on the fundamentals of the problem. Another potential remedy to contractual incompleteness is given by rigid rules, i.e. rules that are not product-specific. We argue that the nondiscrimination rule is the only rule of this kind that increases ex ante efficiency for any probability distribution over potential products. Finally we show that, under relatively weak conditions, the optimal ex-ante agreement is structured in three parts: (i) a set of clauses that specify standards for existing products; (ii) a rigid nondiscrimination rule, and (iii) a dispute settlement procedure. Although the model focuses on the case of product standards, the analysis suggests a more general incomplete-contracting theory of trade agreements.

Abstract:
We investigate whether a welfare-maximizing government ought to pursue a program of strategic trade intervention or instead commit itself to free trade when domestic firms will have an opportunity to manipulate the government's choice of the level of intervention. Domestic firms may overinvest in physical and knowledge capital in a regime of strategic intervention in order to influence the government's choice of subsidy. In the event commitment to free trade may be desirable even in settings where profit-shifting would be possible. We analyze the desirability of such a commitment when the government is well informed about firms types and actions, and when it suffers from an informational disadvantage.

Abstract:
We investigate whether a welfare-maximizing government ought to pursue a programme of strategic trade intervention or instead commit itself to free trade when, in the former case, domestic firms will have an opportunity to manipulate the government's choice of the level of intervention. Domestic firms may over-invest in physical and knowledge capital in a regime of strategic intervention in order to influence the government's choice of subsidy. In the event, a commitment to free trade may be desirable even in settings where profit-shifting would be possible. We analyse the desirability of such a commitment when the government is well informed about firms' types and actions, and when it suffers from an informational disadvantage.

Abstract:
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.

Abstract:
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.

Endogenously incomplete contracts, GATT, trade agreement, WTO

Abstract:
Formal economic analysis of trade agreements typically treats disputes as synonymous with concerns about enforcement. But in reality, most WTO disputes involve disagreements of interpretation concerning the agreement, or instances where the agreement is simply silent. And some have suggested that the WTO's Dispute Settlement Body (DSB) might serve a useful purpose by granting exceptions to rigid contractual obligations in some circumstances. In each of these three cases, the role played by the DSB amounts to completing various dimensions of an incomplete contract. Moreover, there is a debate among legal scholars on whether or not precedent-setting in DSB rulings may enhance the performance of the institution. All of this points to the importance of understanding the implications of the different possible degrees of activism in the role played by the DSB. In this paper we bring formal analysis to bear on this broad question. We characterize the choice of contractual form and DSB role that is optimal for governments under various contracting conditions. A novel feature of our approach is that it highlights the interaction between the design of the contract and the design of the dispute settlement procedure, and it views these as two components of a single over-arching institutional design problem.

Abstract:
The idea that commitment is valuable plays a key role in many economic models. However, Bagwell (1995) has shown that commitment may have no value if there is (even a slight) noise in the observation of the leader's action, thus casting doubt on the notion that commitment has strategic value. Here I reconsider the commitment story in a model where the leader's action is imperfectly observed and the leader has private information, and I examine how it is affected by uncertainty about the leader's type and by the observation noise.

Abstract:
In this article I analyze strategic investment under uncertainty in a new market, where firms face a tradeoff between commitment and flexibility. The model predicts asymmetric equilibria under fairly general conditions, even though firms are ex ante identical and have symmetric opportunities to enter the market. In equilibrium, one firm commits to early investment and the other firm follows a wait-and-see strategy. In the ex post outcome, firms end up with asymmetric sizes if the market profitability turns out close to, or lower than, expected; firms end up in symmetric position if the market turns out highly profitable. If uncertainty is small, the model yields (approximately) Stackelberg outcomes.