MichUDeptEResSIED#262RESEARCH SEMINAR IN INTERNATIONAL ECONOMICSDepart - PDF document

MichUDeptEResSIED#262RESEARCH SEMINAR IN
MichUDeptEResSIED#262RESEARCH SEMINAR IN INTERNATIONAL ECONOMICSDepartment of EconomicsThe University of MichiganAnn Arbor, Michigan 48109-1220SEMINAR DISCUSSION PAPER NO. 262GATT

: A COOPERATIVE EQUILIBRIUM INA NONCOOPE
: A COOPERATIVE EQUILIBRIUM INA NONCOOPERATIVE TRADING REGIME?byThomas L. HungerfordThe University of MichiganMay 1990(Revised)I would like to thank John Chamberlin, Ted Bergstrom

, Mark Bagnoli, Alan Deardorff, andsemin
, Mark Bagnoli, Alan Deardorff, andseminar participants at Michigan and Wayne State for comments on earlier versions ofthis paper. Any remaining errors are, of course, my own.SUMN

ER AND LAURAFOSTER LIBRARYJ U T O MITHE
ER AND LAURAFOSTER LIBRARYJ U T O MITHE UNIVERSITY OF MICHIGANthe General instead impeding restrictions (Stern involves each the optimalthe terms another country tariffs. On and

Jensen cooperative behavior in an to 'r
Jensen cooperative behavior in an to 'reversionary' the tariff The final will be the state by increasing In this world prices use of welfare level) to as of adversely demand f

unction can (and thus Marshall-Lerner co
unction can (and thus Marshall-Lerner condition rents aretrade barriers,6 continuously differentiable assumed initially observable variable could be GNP function in the the retal

iation be country level of other country
iation be country level of other country as an the single-period gain from--) the single-period need to of country it placesThe intuitive its investigation is assumedIf the /;

+ (1 Again, this value payoff the increa
+ (1 Again, this value payoff the increase of getting two rigid for a to be amr assuming let V5(b3) be country j's discounted present value payoff from cooperating andspending by

on trade investigations. In this case V
on trade investigations. In this case Vj has the functional formt-1 3V(b)iVj(b3) = Hi( pi)+ Pr(irj � frj)f(b, pi){#4Kf(by)+ -E = H + 0-V5(bg)t= 2+ Pr(r j � r )(1 -y

j(bj, pj))(#jHj(p , bj)+ -FlVj(bj))+ jP
j(bj, pj))(#jHj(p , bj)+ -FlVj(bj))+ jPr (irj fr)Vy(b ) (11)whereHg(p j) = E6Hj(r, 0,ip 0, 3;, 65),Hj= EHj(, s ,0,6;,65,Hj(pg, b3) = E8Hj(3Q, 0, ;, by 56j,6j),andH (bj)= 9EHg(s s

,b ,Sj).Some manipulation of equation (
,b ,Sj).Some manipulation of equation (11) givesH iV17b ) = -Hj -Hg(p -) + # (I -F(tr)) tHij- ((12H)(b ) (1 --y )Hg(pg, b 1) )1 #(O# + F(frg) -OjF(trg)) + 7(1 -FOrt)( *or country

j's payoff if country i defects is what
j's payoff if country i defects is what it would receive in retaliatory periodsminus a weighted average of the difference between its single-period payoff from retaliationand the

'suckers' payoff (H&i)) and the differe
'suckers' payoff (H&i)) and the difference between retaliation and the expectedsingle-period payoff from launching an investigation.The first order condition for expression (12)

yields the necessary condition for a max
yields the necessary condition for a max-inmm with respect tob:Vj(by) = 0. (13)This expression gives two more constraints on the equilibriurn vector. This expression isalso a func

tion of both by and y; When pg equals ze
tion of both by and y; When pg equals zero the optimal value of b y is zero since12 The full expression is found in the appendix.10The intersection is modeled of the an ambiguous

the equilibrium an infinitely repeated
the equilibrium an infinitely repeated game with the threat of punishment but free trade (or some othernegotiated tariff binding) is not the equilibrium outcome. The present res

ults fit with re-ality: the record shows
ults fit with re-ality: the record shows that today most industrialized countries impede trade with NTBs(Nogu6s, Olechowski and Winters 1986).12(12) is:Chicago Press.Series on o

f NontariffUnited Nations, Bewley, ed.,
f NontariffUnited Nations, Bewley, ed., Cambridge University Press.Green, Edward Price Information," of International Riezman, Raymond Policies in Amsterdam: North-1 The NTB Equi