Is There A Novelty Premium On New Financial Instruments?

This paper provides a political economy analysis of the incentives underpinning a country's decision to enter a regional trade agreement when a multilateral free trade agreement is available, and of how entering a regional trade agreement affects the incentives to pursue multilateral trade liberalization. Taking into account the influence exerted by organized interest groups in the formation of trade agreements, the authors derive a formal condition under which a regional trade agreement is preferred to a multilateral one. Furthermore, they show that a country's decision to enter a regional trade agreement unambiguously undermines the incentives towards multilateral trade liberalization.