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The authors provide a simple but novel model of trade agreements that highlights the role of transaction costs, renegotiation and dispute settlement. The model allows characterizing the appropriate remedy for breach and whether the agreement should be structured as a system of "Property rights" or "Liability rules." They then study how the optimal rules depend on the underlying economic and contracting environment. Their model also delivers predictions about the outcome of trade disputes, and in particular about the propensity of countries to settle early versus "Fighting it out."
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