Speakers

Kyle Bagwell

Stanford University

International negotiations on international trade and related issues

I summarize some recent research that uses game theory to better understand the purpose and design of the WTO. Historical experience and traditional trade-agreement theory suggest that non-cooperative interactions between governments result in tariffs that are inefficiently high. From this perspective, the WTO's purpose may be understood in terms of the desire of governments to cooperate by reciprocally lowering tariffs, so as to solve their Prisoners' Dilemma problem. But, if this is the purpose of the WTO, are the rules of the WTO well designed? The principles of reciprocity and non-discrimination (MFN) are the two pillars of the WTO architecture, and I will describe theoretical findings suggesting that these principles are well designed to deliver efficiency-enhancing tariff reductions. Drawing on the theory of repeated games, I will also interpret the manner in which WTO agreements are enforced. Recent work of this kind considers repeated games with shocks to public state variables, imperfect monitoring, and private information.

Mostafa Beshkar

University of New Hampshire

Third-Party-Assisted Renegotiation of Trade Agreements

I study renegotiation of trade agreements when governments have the option to resort to "non-binding" arbitration to settle their disputes. The model is rich enough to allow for pre-trial and post-trial settlement negotiations, non-compliance, and retaliations in a setting like the WTO. Among other results, I find that governments bene…fit from the existence of an arbitration system even if this system is non-binding and has no informational advantage over the disputing parties. However, due to uncertainty in the rulings of the DSB, the disputants have a collective interest in …finding a settlement without resorting to DSB arbitration. Nevertheless, governments occasionally resort to arbitration, while they may choose not to comply with the rulings. Moreover, an optimal arbitration system always rules at least partly against the defendant, which may explain the apparent pro-complainant bias in the WTO rulings.

Timothy Besley

London School of Economics

Accountability and Incentives in Public Service Provision in Poor Countries

Public service delivery is a major challenge in building effective states. This is particularly true in developing countries where resources are scarce and the returns to good performance can be high. This lecture will discuss the underlying theoretical models for thinking about these issues and relate this to current policy debates. It will explore some models that can be useful in understanding how to achieve political accountability including the role of the media and decentralized decision making. It will also discuss how incentives and selection of good policy makers can serve as complementary forces in getting government to work.

Renee Bowen

Stanford University

Limits of the WTO as a self-enforcing institution

Is there a limit to trade cooperation that the WTO can facilitate? In this paper I present a theory of the WTO in which it is an equilibrium outcome of multiple bilateral repeated prisoners' dilemma games among countries. I show that when a sufficient number of countries participate in multilateral sanctions under the WTO, the threat of these sanctions provides incentives to use the forbearance o ered by the Dispute Settlement Mechanism (DSM). This causes countries to obtain outcomes that improve joint welfare. I show that there are limits to forbearance that can be sustained by this mechanism. The results provide a theoretical basis for the DSM to o er prospective punishments rather than retroactive punishments and suggests a critical role for renegotiation.

Rahul Deb

University of Toronto

Relational Contract Farming: Theory and Case Evidence

(Joint work with Tavneet Suri)

Contract farming is a widespread practice in the developing world and is a means by which farmers get access to credit for inputs and a market for their output. The providers of the credit benefit as the use of better inputs ensures better quality produce. These contracts are often informal word of mouth contracts and, as a result, there are numerous hurdles which must be overcome in order for contract farming to function successfully. For example, the farmer may misuse the loans provided for inputs in non-production activities or she may choose to default on the loan entirely. We develop a relational contracting model which demonstrates how contract farming can function successfully despite these issues. We show that under different situations, the nature of the profit maximizing contract varies. Credit is either provided in-kind or as a combination of in-kind and cash. We provide case evidence in support of the model. This evidence is a combination of our fieldwork in Ghana as well as from the literature.

Avinash Dixit

Princeton University

Trade and investment in LDCs and transition economies with poor governance

Imperfections in the rule of law create new problems of contractibility, in addition to the usual issues of unverifiability of information. Alternative social institutions for governance of property and contract arise but are also imperfect, and can interact well or poorly with the formal state institutions. Security of property and contract is especially problematic for foreign traders and investors. This paper will consider some theoretical analysis of such situations. The game-theoretic ideas and methods are basically those of bilateral and multilateral repeated games, with issues of asymmetric information and imperfect communication added.

Juan Escobar

University of Chile

Self Governance in Networked Relationships

(Joint work with Felipe Balmaceda)

This paper studies the problem of self governance in a model in which information flows are governed by the community structure. Players receive information only from their own social contacts and may act upon after receiving news about opportunistic behavior. We explore the social structures leading to self governance and emphasize how the matching technology shapes the architecture of such structures. Conditions under which self governance emerges only in cohesive communities are derived.

Haldun Evrenk

Suffolk University

Party-bosses vs. party-primaries: quality of legislature under di erent selectorates

(Joint work with Timothy Lambie-Hanson)

We study the equilibrium quality of the legislature under two selectorates: the party-principal and the party-primary. In our model, two parties compete in three districts; each party has three candidates who diff er in their quality. Each voter prefers higher quality, but the median voters in each district differ in their most-preferred policies: two are home districts of each party while the third is a battleground district characterized by weaker and uncertain (at the time candidates are allocated to districts) policy preferences. We find that when home districts are "safe" and the parties' candidate pools relatively balanced in terms of quality, an equilibrium legislature under party-primaries is always of higher quality than an equilibrium legislature under party-principals.

Raja Kali

University of Arkansas

Political Connections, Entrepreneurship, and Social Network Investment

(Joint work with Nisvan Erkal)

The recent literature on politically connected firms documents that connections between …firms and politicians or politically parties is both globally widespread and contributes value to such …firms. However, there is little research on how entrepreneurs without direct political access cope with the grabbing hand of government. For entrepreneurs, the source of political connections is usually their social network. We develop a general model linking entrepreneurship, social networks, and political influence. The purpose of the model is to unravel the economic forces behind the trade-offs entrepreneurs face in such an environment and how entrepreneurial choices are altered by changes in the environment on the path to economic development, such as deregulation, market development, and economic growth.

James Lake

Johns Hopkins University

Preferential trade agreements as building or stumbling blocs? The importance of commitment

Will continual expansion of preferential trade agreements (PTAs) lead to global free trade? In the presence of multilateral negotiations, are PTAs necessary for, or will they necessarily lead away from, global free trade? This paper shows both answers depend crucially on a commitment problem faced by PTA members. Because the commitment problem revolves around a desire to commit to not form future PTAs, global free trade is not attained when PTA member's overcome their commitment problem. Market size asymmetry is an important determinant of member's ability to overcome the commitment problem. Higher levels of asymmetry generally increase member's rents and thus their ability to overcome it. This reduces the scope for global free trade. However, there is a threshold level of asymmetry at which the commitment problem cannot be overcome. This dramatically increases the extent to which PTAs both lead to, and are necessary for, global free trade.

Roger Myerson

University of Chicago

The Autocrat’s Credibility Problem and Foundations of the Constitutional State

A political leader's temptation to deny costly debts to past supporters is a central moral-hazard problem in politics. This paper develops a game-theoretic model to probe the consequences of this moral-hazard problem for leaders who compete to establish political regimes. In contests for power, absolute leaders who are not subject to third-party judgments can credibly recruit only limited support. A leader can do better by organizing supporters into a court which could cause his downfall. In global negotiation-proof equilibria, leaders cannot recruit any supporters without such constitutional checks. Egalitarian norms make recruiting costlier in oligarchies, which become weaker than monarchies. The ruler's power and limitations on entry of new leaders are derived from focal-point effects in games with multiple equilibria. The relationships of trust between leaders and their supporters are personal constitutions which underlie all other political constitutions.

Toan Phan

Northwestern University

Asymmetric Information and The Sustainability of Sovereign Debt

This paper shows the role of information asymmetry in sustaining sovereign debt. Bulow and Rogoff (1989) prove that debt must be zero when a borrowing country and foreign creditors have symmetric information regarding the country's income states. There, a defaulting country can use income insurance contracts, which are sufficient to replicate the debt contracts that the country has reneged upon. However, when the government has private information, this paper shows debts are possible. The crucial assumption is that a country knows more about its income than foreign lenders. In equilibrium, the country does not exploit this private information, due to a public monitoring technology. However, foreign lenders associate defaults with a tendency to misreport incomes. Thus the punishment is stronger than that in Bulow Rogoff: a defaulting country is not only banned from future credit, but also banned from future income-contingent insurance. If calibrated to emerging markets' data, the model has a potential to explain non-trivial ratios of sustainable debt over GDP. The paper then discusses its relevance to a recent policy debate about the international debt market. Rather surprisingly, increasing the verifiability of GDP data does not always increase the size of the GDP-indexed bond market, as previously hypothesized in the literature. More information might lead to less supported sovereign borrowing.

Kamal Saggi

Vanderbilt University

Equilibrium parallel import policies and international market structure

(Joint work with Santanu Roy)

This paper derives equilibrium government policies towards parallel imports in a North-South model where the Northern firm produces high quality and the Southern firm produces low quality. Given policies, each firm decides whether or not to serve the other country`s market. If Northern consumers have sufficiently higher preference for high quality, the Northern government forbids parallel imports and international price discrimination obtains: when the threat of indirect competition from arbitrage-induced parallel imports is absent, firms choose to directly compete in both markets. If demand structures are relatively similar across countries, the North permits parallel imports and uniform pricing obtains.

Farzad Saidi

New York University

Networks, Finance, and Development: Evidence from Hunter-Gatherers

This paper sheds light on the relationship between social networks and market incompleteness in an Amazonian hunter-gatherer society. In that economy, individuals enter informal contracts to finance, besides their foraging-farming activities, relatively risky human capital investments in pursuit of employment outside the villages. While the default financing contract can be characterized as debt, insurance in the form of equity-like financing is only available from fellow villagers. However, in order to maintain the stability of the village networks, human capital investments are underfunded with insurance. I show that this capital market imperfection potentially leads to substantial underinvestment in human capital, and calibrate the counterfactual efficiency gains from completing the market.