Estimating a Model of Settlement Bargaining in the World Trade Organization

Abstract

Small and large countries show divergent behavior in the dispute settlement process of the WTO. Disputes that involve larger economies are more likely to result in litigation. Moreover, in a dispute between a large country and a small country, litigation is more likely if the small country is the complaining party. I modify canonical models of settlement bargaining under asymmetric information (namely, Bebchuk 1984, and Reinganum and Wilde 1986) by assuming that governments are restricted to use policy adjustment, rather than cash payments, as a means of compensation in their settlement negotiations. A key theoretical prediction of the modified models is that the likelihood of settlement is more sensitive to the defendant's litigation costs than to the complainant's litigation costs. This theoretical prediction combined with the assumption that smaller countries face higher costs of litigation explains the divergent behavior of small and large countries in the dispute settlement process.

Keywords: Settlement Bargaining, Dispute Settlement Process, Trade Agreements

JEL Classification: F13, K33, K41