Free Trade Networks

The paper examines the formation of free trade agreements (FTAs) as a network formation game. We consider a general n-country model in which countries trade differentiated industrial commodities as well as a numeraire good. Countries may be different in the size of the industrial good industry (measure of firms) and the market size (population size). Their incentives to sign an FTA depend on these characteristics of their own countries and those of their partner countries. We show that if all countries are symmetric, a complete global free trade network is pairwise stable and it is the unique stable network if industrial commodities are not highly substitutable. We also compare FTAs and customs unions (CUs) as to which of these two regimes facilitate global trade liberalization, emphasizing the fact that unlike in the case of a CU, each country signing an FTA can have a new FTA with an outside country without consent of other member countries.Free trade agreement, Customs union, Global free trade, Theory of network, Pairwise stability

"Firm Heterogeneity under Financial Imperfection: Impacts of Trade and Capital Movement"

The paper examines the impacts of trade and capital movement between North and South, which differ in the quality of financial institution, on the productivity distribution and other characteristics of a financially-dependent industry. We find that financial imperfection causes firm heterogeneity and that trade and capital movement are complements in the sense that trade in goods affects the productivity distribution only when accompanied by international capital movement (trade induces capital outflow from South when capital has been internationally mobile). We also find that an international difference in financial development induces reciprocal foreign direct investment.

Contributing or Free-Riding? A Theory of Endogenous Lobby Formation

We consider a two-stage public goods provision game: In the first stage, players simultaneously decide if they will join a contribution group or not. In the second stage, players in the contribution group simultaneously offer contribution schemes in order to influence the government’s choice on the level of provision of public goods. Using perfectly coalition-proof Nash equilibrium (Bernheim, Peleg and Whinston, 1987 JET), we show that the set of equilibrium outcomes is equivalent to an "intuitive" hybrid solution concept, the free-riding-proof core, which is always nonempty but does not necessarily achieve global efficiency. It is not necessarily true that an equilibrium lobby group is formed by the players with highest willingness-to-pay, nor is it a consecutive group with respect to their willingnesses-to-pay. We also show that the equilibrium level of public goods provision shrinks to zero as the economy is replicated.Common Agency, Public Good, Free Rider, Core, Lobby, Coalition Formation, Coalition-proof Nash Equilibrium

Global Dynamics in Infinitely Repeated Games with Additively Separable Continuous Payoffs

This paper studies a class of infinitely repeated games with two players in which the action space of each player is an interval, and the one-shot payoff of each player is additively separable in their actions. We define an immediately reactive equilibrium (IRE) as a pure-strategy subgame perfect equilibrium such that each player's action in each period is a stationary function of the other player's last action. We completely characterize IREs and their dynamics in terms of certain indifference curves. In a special case we establish a folk-type theorem using only IREs that are continuous and punish deviations in a minimal way. Our results are used to show that in a prisoners' dilemma game with observable mixed strategies, gradual cooperation occurs when the players are sufficiently patient, and that in a certain duopoly game, kinked demand curves emerge naturally.Immediately reactive equilibria, Additively separable pay-offs, Kinked demand, Gradual cooperation, Prisoners'dilemma

Immediately Reactive Equilibria in Infinitely Repeated Games with Additively Separable Continuous Payoffs

This paper studies a class of infinitely repeated games with two players in which the action space of each player is an interval, and the one-shot payoff of each player is additively separable in their actions. We define an immediately reactive equilibrium (IRE) as a pure-strategy subgame perfect equilibrium such that the action of each player is a stationary function of the last action of the other player. We show that the set of IREs in the simultaneous move game is identical to that in the alternating move game. In both games, IREs are completely characterized in terms of indifference curves associated with what we call effective payoffs. A folk-type theorem using only IREs is established in a special case. Our results are applied to a prisoner's dilemma game with observable mixed strategies and a duopoly game. In the latter game, kinked demand curves with a globally stable steady state are derived.

Firm Heterogeneity under Financial Imperfection: Impacts of Trade and Capital Movement

The paper examines the impacts of trade and capital movement between North and South, which differ in the quality of financial institution, on the productivity distri- bution and other characteristics of a financially-dependent industry. We find that financial imperfection causes firm heterogeneity and that trade and capital movement are complements in the sense that trade in goods affects the productivity distribu- tion only when accompanied by international capital movement (trade induces capital outflow from South when capital has been internationally mobile). We also find that an international difference in financial development induces reciprocal foreign direct investment.

Contributing or Free-Riding? Voluntary Participation in a Public Good Economy

We consider a (pure) public goods provision problem with voluntary participation in a quasi-linear economy. We propose a new hybrid solution concept, the free-riding-proof core (FRP-Core), which endogenously determines a contribution group, public good provision level, and its cost-sharing. The FRP-Core is always nonempty in public good economies but does not usually achieve global efficiency. The FRP-Core has support from both cooperative and noncooperative games. In particular, it is equivalent to the set of perfectly coalition-proof Nash equilibrium (Bernheim, Peleg, and Whinston, 1987) of a dynamic game with players' participation decisions followed by a common agency game of public goods provision. We illustrate various properties of the FRPCore with an example. We also show that the equilibrium level of public good shrinks to zero as the economy is replicated.endogenous coalition formation, externalities, public good, perfectly coalition-proof Nash equilibrium, free-riders, free-riding-proof core, lobbying, common agency game

Contributing or free-riding? Voluntary participation in a public good economy

We consider a (pure) public goods provision problem with voluntary participation in a quasi-linear economy. We propose a new hybrid solution concept, the free-riding-proof core (FRP-Core), which endogenously determines a contribution group, public goods provision level, and how to share the provision costs. The FRP-Core is always nonempty in public goods economies but does not usually achieve global efficiency. The FRP-Core has support from both cooperative and noncooperative games. In particular, it is equivalent to the set of perfectly coalition-proof Nash equilibria (Bernheim, Peleg, and Whinston, 1987) of a dynamic game with players' participation decisions followed by a common agency game of public goods provision. We illustrate various properties of the FRP-Core with an example. We also show that the equilibrium level of public goods shrinks to zero as the economy is replicated.Endogenous coalition formation, externalities, public good, perfectly coalition-proof Nash equilibrium, free riders, free-riding-proof core, lobbying, common agency game

A Theory of Government Procrastination

We present a theory to explain government procrastination as a consequence of its present-bias resulting from the political uncertainty in a two-party political system. We show that under a two-party political system the party in office tends to be present-biased. This may lead to inefficient procrastination of socially beneficial policies that carry upfront costs but yield long-term benefits. However, procrastination is often not indefinite even as we consider an infinite-horizon game. There exist equilibria in which the policy is implemented, and in many cases carried out to completion in finite time. When the net social benefit is large, there is no procrastination problem. When the net social benefit is small, the policy can be procrastinated indefinitely, though there may co-exist some gradual implementation equilibria. When the net social benefit is intermediate in magnitude, there are all sorts of procrastination equilibria, including gradual implementation. The theory predicts that a government with a more strongly predominant party tends to procrastinate less.present-bias, procrastination, policy implementation

Free-Riding-Proof International Environmental Agreements

We study international free-riding-proof coalitions to solve trans-boundary environmental problems such as global warming. We show that the free-riding problem is rather serious so that a free-riding-proof coalition can consist of only a small number of countries. In the optimal coalitional structure, therefore, the world would be divided into many small groups. For each group, if countries are symmetric, their individual incentives to join a group are identical across the two regimes of environmental coalitions: the non-transferable utility (NTU) regime and transferable utility (TU) regime. If member countries are asymmetric, however, groups are more stable under the TU regime than under the NTU regime since the former regime enables the member countries to pool their incentives. International cooperation (within each group) on carbon taxes is shown to be equivalent to the NTU regime, while emission permit trading is shown to be equivalent to the TU regime. Therefore, the emission permit trading system can be considered to be superior in the world of asymmetric countries.