Multilateral Stability and Efficiency of Trade Agreements: A Network Formation Approach

Munich Discussion Paper No. 2013-3, Department of Economics, University of Munich

30 Pages Posted: 3 Sep 2012 Last revised: 3 Jan 2020

See all articles by Nathalie Jorzik

Nathalie Jorzik

Heidelberg University

Frank Mueller-Langer

University of the Bundeswehr Munich; Max Planck Institute for Innovation and Competition; European Commission, Joint Research Center

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2013

Abstract

We study the endogenous network formation of bilateral and multilateral trade agreements by means of hypergraphs and introduce the equilibrium concept of multilateral stability. We consider multi-country settings with a firm in each country that produces a homogeneous good and competes as a Cournot oligopolist in each market. Under endogenous tariffs, we find that the existence of a multilateral trade agreement is always necessary for the stability of the trading system and that the formation of preferential trade agreements is always necessary for achieving global free trade. We also find that global free trade is efficient but not necessarily the only multilaterally stable trade equilibrium when countries are symmetric (heterogeneous) in terms of market size. We derive conditions under which such a conflict between overall welfare efficiency and stability occurs.

Keywords: Preferential trade, multilateral trade agreements, multilateral stability, GATT, network formation

JEL Classification: F13, F12, D85, C72

Suggested Citation

Jorzik, Nathalie and Mueller-Langer, Frank, Multilateral Stability and Efficiency of Trade Agreements: A Network Formation Approach (January 18, 2013). Munich Discussion Paper No. 2013-3, Department of Economics, University of Munich, Available at SSRN: https://ssrn.com/abstract=2140349 or http://dx.doi.org/10.2139/ssrn.2140349

Nathalie Jorzik

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

Frank Mueller-Langer (Contact Author)

University of the Bundeswehr Munich ( email )

Munich
Germany

Max Planck Institute for Innovation and Competition ( email )

Munich
Germany

European Commission, Joint Research Center

Seville
Spain

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
94
Abstract Views
1,113
rank
346,998
PlumX Metrics