Essays on international trade agreements and contracts under renegotiation
- Author(s): Buzard, Kristina L.
- et al.
The first chapter of the dissertation addresses general issues in contracting with external enforcement. We study a contracting environment with specific investments in which renegotiation, and therefore hold-up, is possible. We show that taking account of the precise nature of trading and investment technologies is important for accurately determining the trading relationships in which efficient investment and trade will occur and that careful modeling of institutional detail and the information available to private parties and the external enforcement body (e.g. a court) are key. The second chapter presents a model of international trade agreements in which domestic policy-making power is shared between executive and legislative branches of government. Acknowledging the complexity of the legislative process as well as its susceptibility to lobbying reveals a political commitment role for trade agreements in that executives can use them to reduce incentives for lobbying so that the legislatures can better withstand political pressure. This helps explain the result from tests of the Grossman and Helpman (1994) model that there is too much protection relative to contributions given estimates of governments' social- welfare weights : I predict that contribution levels may in fact be low because tariffs have been raised to prevent political pressure and the increased risk of a trade disruption it engenders. The third chapter extends this model to a repeated-game framework, replacing the assumption of external enforcement with self-enforcing promises of future cooperation. Here, the inability of actors to make commitments affects the design of trade agreements in two ways: executives must not only take into account the legislatures' lobbying-driven propensity to revoke delegation and break the agreement, but also be robust to the executives' own incentives to renegotiate out of any punishment scheme. The design of the dispute resolution mechanism that makes the optimal punishment incentive compatible must balance two, often-conflicting, objectives: longer punishment periods help to enforce cooperation by increasing the costs of defecting from the agreement, but because the lobbies prefer the punishment outcome, this also incentivizes lobbying effort and with it the political pressure to break the agreement. Thus the model generates new predictions for the optimal design of mechanisms for resolving the disputes that arise in the course of trade-agreement relationships