Essays on Institutions of International Trade

Abstract

This dissertation is an economic analysis of the legal aspects of international trade institutions. In particular, I analyze the system of remedies, the role of a court for international trade disputes, and settlement bargaining in an international setting. I find that an optimal system of remedies for breach of international trade agreements involves a less-than-commensurate compensation scheme. Therefore, I show that the award of expectation damages, which prescribes full compensation of the injured party and is usually used by domestic courts to promote efficient breach, is not an optimal rule in the context of international trade agreements. I also investigate the role of an international court that provides no external enforcement. I model such a court as an impartial entity that investigates the state of the world and issues public signals regarding the prevailing contingency. I show that trading partners can maintain a higher level of cooperation when such a public signaling device is available. Moreover, I show that under certain conditions an international court can further enhance cooperation by taking a strategic bias in favor of protectionism. I also analyze the bargaining process through which parties to a trade agreement try to settle their disputes without invoking the costly process of the court. In contrast to the findings of the literature on pretrial settlement bargaining in domestic legal systems, I find that the likelihood of settlement depends on the allocation of litigation costs between the disputing parties. I highlight a specific dispute settlement pattern in the World Trade Organization (WTO) that has not been studied in the literature. In a dispute between a large country and a small country, an early settlement is less likely when the small country is the complaining party. Using the settlement bargaining model presented in this dissertation, I show that this pattern can be attributed to differences in litigation costs of different countries. Finally, I conduct an empirical analysis of pretrial settlement bargaining in the WTO, and I find evidence in support of my theory. I also find that the existence of interested third-parties has a significantly positive effect on the likelihood of out-of-court settlement.