Why are trade agreements regional?
Zissimos, B., 2011. Why are trade agreements regional? Review of International Economics, 19 (1), pp. 32-45.
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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.
|Departments||Faculty of Humanities & Social Sciences > Economics|
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