“Third-Party-Assisted Renegotiation of Trade Agreements (October 2008)”     [Download]

Abstract: I study the design and implementation of trade agreements under the assumption that governments have private information about the fluctuating political pressure they face from domestic interest groups to restrict trade. The Dispute Settlement Body (DSB) of the World Trade Organization is modeled as an impartial entity that provides `recommendations' for the resolution of disputes based on its imperfect observation of the state of the world. The novel feature of my approach is to model post-ruling bargaining between the parties, who regard the recommendations of the DSB as a reference point. The recommendations of the DSB have the effect of framing the renegotiations in favor of the party who is more likely to have a legitimate claim. This renegotiation framing affects the efficiency of the bargaining outcome by reducing the cost of providing incentive for revelation of private information. The model has rich predictions regarding the behavior of the disputing parties and the ruling pattern of the DSB. In particular, noncompliance with the DSB rulings emerges as a potential outcome on the equilibrium path. Moreover, the model predicts that the rulings of the DSB are always at least partly against the defending party, which may explain the observed pro-trade bias in the DSB rulings.

“Trade Skirmishes and Safeguards: A Theory of the WTO Dispute Settlement Process.” Revised and Resubmited to the Journal of International Economics (Latest Version: February 2009) [Download]

Abstract: I propose a framework within which to interpret and evaluate the major reforms introduced to the GATT system in its transition to the WTO. In particular, I examine the WTO Agreement on Safeguards that has replaced the GATT escape clause (Article XIX), and the Dispute Settlement Process (DSP) that resembles a court of law under the WTO. Using this framework, I interpret the weakening of the reciprocity principle under the Agreement on Safeguards as an attempt to reduce efficiency-reducing trade skirmishes. The DSP is interpreted as an impartial arbitrator that issues nonbinding rulings about the state of the world when a dispute arises among member countries. I demonstrate that the reforms in the GATT escape clause should be bundled with the introduction of the DSP, in order to maintain the incentive-compatibility of trade agreements. The model implies that trade agreements under the WTO lead to fewer trade skirmishes but this effect does not necessarily result in higher payoffs to the governments. The model also implies that the introduction of the WTO court, which has no enforcement power, can actually improve the self-enforceability of trade agreements.

“Optimal Remedies in International Trade Agreements.” Revised and   Resubmited to the European Economic Review (May 2008) [Download]

“Estimating a Model of Dispute Settlement in the World Trade Organization”, Working Paper (July 2008) [Download]

Abstract: I utilize canonical models of settlement bargaining under asymmetric information (namely, Bebchuk 1984, and Reinganum and Wilde 1986) to analyze the dispute settlement patterns in the World Trade Organization. I extend these models to study the determinants of out-of-court settlement in a situation where the parties' relationship is characterized by a prisoners' dilemma--- a feature of most trade partnerships. This added feature alters the prediction of the classic models that the allocation of litigation costs between disputants has no bearing on the likelihood of settlement. In particular, I find that the likelihood of settlement is more sensitive to the defendant's litigation costs than to the complainant's litigation costs. I estimate the above bargaining models using a database of the WTO disputes. I conduct both structural and reduced form analysis and I find evidence in support of the bargaining models as extended in this paper. In particular, the distribution of litigation costs between the disputants is an important determinant of settlement likelihood.

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