Equity-Efficiency Tradeoffs in International Bargaining
34 Pages Posted: 29 Jan 2019
Date Written: December 2018
This paper analyzes the outcome of international negotiations between asymmetric countries in the absence of efficient transfers. A main result is that there is a equity-efficiency tradeoff to reducing the flexibility of negotiations in making transfers across countries. Specifically, an increase in the inefficiency of transfers will reduce aggregate global welfare but, when the degree of asymmetry is sufficiently small, can result in a more equitable agreement that benefits the country that is at a bargaining disadvantage. Similarly, we demonstrate that increases in bargaining asymmetry can also make the disadvantaged country better-off at the expense of global welfare. As an application, we show that preventing monetary side-payments in trade negotiations between a large and small country can benefit the small country at the expense of the overall efficiency of the agreement.
Keywords: bargaining, negotiations, international agreements
JEL Classification: F13, C78
Suggested Citation: Suggested Citation