CFDP 1735

Breach, Remedies and Dispute Settlement in Trade Agreements


Publication Date: October 2009

Pages: 52


We provide a simple but novel model of trade agreements that highlights the role of transaction costs, renegotiation and dispute settlement. The model allows us to characterize the appropriate remedy for breach and whether the agreement should be structured as a system of “property rights” or “liability rules.” We then study how the optimal rules depend on the underlying economic and contracting environment. Our model also delivers predictions about the outcome of trade disputes, and in particular about the propensity of countries to settle early versus “fighting it out.”


International trade agreements, Breach remedies, Dispute settlement

JEL Classification Codes:  D02, D86, F13, K12, K33


Published in Quarterly Journal of Economics (February 2011), 126(1): 475-515 [DOI]