In trade agreements, governments can design remedies to ensure compliance (property rule) or to compensate victims (liability rule). This paper describes an economic framework to explain the pattern of remedies over non-tariff restrictions — particularly domestic subsidies and nonviolation complaints subject to liability rules. The key determinants of the contract form for any individual measure are the expected joint surplus from an agreement and the expected loss to the constrained government. The loss is higher for domestic subsidies and nonviolations because these are the policies most likely to correct domestic distortions. Governments choose property rules when expected gains from compliance are sufficiently high and expected losses to the constrained country are sufficiently low. Liability rules are preferable when dispute costs are relatively high, because inefficiencies in the compensation process reduce the number of socially inefficient disputes filed.
|Published - Oct 2014
|FGV Direito SP Research Paper Series (Special Edition)