TY  - JOUR
AU  - Bagwell,Kyle
TI  - Self-Enforcing Trade Agreements and Private Information
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14812
PY  - 2009
Y2  - March 2009
UR  - http://www.nber.org/papers/w14812
L1  - http://www.nber.org/papers/w14812.pdf
N1  - Author contact info:
Kyle Bagwell
Department of Economics
Stanford University
Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
Tel: (650) 723-3251
E-Mail: kbagwell@stanford.edu
AB  - This paper considers self-enforcing trade agreements among privately informed governments. A trade agreement that uses weak bindings (i.e., maximal tariff levels) is shown to offer advantages relative to a trade agreement that uses strong bindings (i.e., precise tariff levels). Consistent with practice, the theory also predicts that governments sometimes apply tariffs that are strictly below their bound rates. When private information is persistent through time, an enforcement "ratchet effect" is identified: a government reveals that it is "weak," and thus that it is unlikely to retaliate in an effective manner, when it applies a low tariff. This effect suggests that a government with a low type may "pool" at an above-optimal tariff, in order to conceal weakness. It also suggests a new information-based theory of gradualism in trade agreements.
ER  -