Why are trade agreements regional?

Reference:

Zissimos, B., 2011. Why are trade agreements regional? Review of International Economics, 19 (1), pp. 32-45.

Related documents:

Official URL:

http://dx.doi.org/10.1111/j.1467-9396.2010.00929.x

Abstract

This paper shows how distance may be used to coordinate on a unique equilibrium in which trade agreements are regional. Trade agreement formation is modeled as coalition formation. In a standard trade model with no distance between countries a familiar problem of coordination failure occurs, giving rise to multiple equilibria; any one of many possible trade agreements can form. With distance between countries, regional trade agreements generate larger rent-shifting effects than nonregional agreements. Countries use these effects to coordinate on a unique equilibrium.

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