Does hidden information make trade liberalization more fragile?

Does hidden information make trade liberalization more fragile?

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Article ID: iaor201111955
Volume: 44
Issue: 2
Start Page Number: 561
End Page Number: 579
Publication Date: May 2011
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors:
Keywords: optimization
Abstract:

This paper focuses on the impact of hidden information on strategic interaction in the context of trade agreements. In the presence of informational asymmetry it is possible that a tradeoff between liberalization and sustainability of cooperation emerges. It is shown that it may be optimal to agree on a degree of liberalization associated with a strictly positive ex ante probability of deviation occurring. In that case, cooperation will break down in finite time, and the optimal degree of liberalization cannot be applied indefinitely.

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