On the Role and Design of Dispute Settlement Procedures in International Trade Agreements
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.
We thank Pierpaolo Battigalli, Mostafa Beshkar, Rick Bond, Alvaro Bustos, Christina Davis, Avinash Dixit, Eric French, Nuno Limao, Kristopher Ramsay, Alan Sykes, Thierry Verdier, Ben Zissimos, seminar participants at the Chicago Federal Reserve, Georgetown, George Washington University, Georgia Tech, Paris School of Economics, Stanford, Vanderbilt, Yale and participants in the 2007 UCSC International Conference, the 2008 AEA Meeting in New Orleans, and the 2008 Princeton-Yale Conference on Reputations and International Agreements for helpful comments. Maggi and Staiger gratefully acknowledge financial support from the NSF (respectively SES-054552435 and SES-0518802). The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.