International agreements, economic sovereignty and exit
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ACDE Seminar
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We (with co-author Frank Stähler) develop a model in which it is uncertainty about the future domestic policy environment that both makes international cooperation attractive and induces the possibility of a sovereign nation reneging on such an international agreement. We show, in a fairly general setting in which the likelihood of exit is affected by the degree of cooperation, that the possibility of exit reduces the optimal degree of initial cooperation so that ‘full’ cooperation will never be optimal but that the optimal degree of cooperation will never be such as to ‘squeeze out’ any possibility of exit. We illustrate these results in a special case in which the random variables capturing the future policy environment are uniformly and independently distributed and present some simulations of various comparative statics in that case. We argue that the model can be used to interpret phenomena such as Brexit and opposition to the TPP.
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