COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1735 Breach, Remedies and Dispute Settlement in Trade Agreements Giovanni Maggi and Robert W. Staiger October 2009 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." |
