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: | Herzing Mathias |
Keywords: | optimization |
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.