Ana Mauleon, FNRS and CEREC, Facultés Universitaires Saint-Louis, Boulevard du Jardin Botanique 43, B-1000 Brussels, Belgium, and FNRS and CORE, Université Catholique de Louvain, 34 Voie du Roman Pays, B-1348 Louvain-la-Neuve, Belgium (firstname.lastname@example.org). Huasheng Song, CRPE and College of Economics, Zhejiang University, Zheda Road 38, Hangzhou 310027, China, and CORE, Université Catholique de Louvain (email@example.com). Vincent Vannetelbosch, FNRS and CORE, Université Catholique de Louvain, 34 Voie du Roman Pays, B-1348 Louvain-la-Neuve, Belgium (firstname.lastname@example.org).
Networks of Free Trade Agreements among Heterogeneous Countries
Article first published online: 12 MAY 2010
© 2010 Wiley Periodicals, Inc.
Journal of Public Economic Theory
Volume 12, Issue 3, pages 471–500, June 2010
How to Cite
MAULEON, A., SONG, H. and VANNETELBOSCH, V. (2010), Networks of Free Trade Agreements among Heterogeneous Countries. Journal of Public Economic Theory, 12: 471–500. doi: 10.1111/j.1467-9779.2010.01461.x
We would like to thank Paul Belleflamme, Rafael Moner-Colonques, Jose Sempere-Monerris, Jacques Thisse, Xavier Wauthy, Myrna Wooders and two anonymous referees for helpful comments and suggestions that helped us to improve the paper. Ana Mauleon and Vincent Vannetelbosch are Research Associates of the National Fund for Scientific Research (FNRS), Belgium. Financial support from the Spanish Ministerio de Educación y Ciencia under the project SEJ2006-06309/ECON, support from the Belgian French Community's program Action de Recherches Concertée 05/10-331 (UCL), and support of a SSTC grant from the Belgian State—Belgian Science Policy under the IAP contract P6/09 are gratefully acknowledged.
- Issue published online: 12 MAY 2010
- Article first published online: 12 MAY 2010
- Received November 9, 2007; Accepted December 6, 2009.
The paper examines the formation of free trade agreements as a network formation game. We consider an n-country model in which international trade occurs between economies with imperfectly competitive product markets. In each country, the labor market is either unionized or non-unionized. We show that, if all countries are non-unionized, the global free trade network is both the unique pairwise stable network and the unique efficient network. If all countries are unionized, the global free trade network is pairwise stable and the unique efficient network among the class of symmetric networks. If some countries are unionized while others are non-unionized, other networks apart from the global free trade network may be pairwise stable. However, the efficient network is still the global free trade network. Thus, a conflict between stability and efficiency may occur. Moreover, starting from the network in which no country has signed a free trade agreement, all sequences of networks due to continuously profitable deviations do not lead (in most cases) to the global free trade network, even when global free trade is stable.