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Matthew Cole, M. Ryan Haley and Aaron Lowen
''A note on bilateral trade agreements in the presence of irreversible investment and deferred negotiations''
( 2008, Vol. 6 No.34 )
A common result in the trade literature is that a small country will realize gains from a bilateral free trade agreement with a large country. McLaren (1997) casts aspersions on this traditional belief by demonstrating that irreversible investment in the small country, with the possibility of re-negotiation by the large country, can actually make the small country prefer autarky to free trade. In this note, we identify a middle ground where the small country can realize above-autarky utility by only partially specializing (relative to the free-trade level of specialization) in export production this improvement occurs even in the presence of irreversible investment and deferred negotiations.
Keywords: irreversible investment
JEL: F1 - Trade: General
Manuscript Received : Aug 26 2008 Manuscript Accepted : Aug 26 2008

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