Madjd-Sadjadi, Zagros; Abdulkadri, Abdullahi O.
Author Affiliation, Ana.
Department of Economics
Relative gains maximizers in a free trade regime
Date of Publication
A version of this paper entitled Is there an optimal non-zero level of protectionism? was presented at CEA 38th Annual Meetings Friday June 4- Sunday June 6, 2004 Ryerson, University, Toronto http:; www.economics.ca/2004/papers/0052.pdf
Examines the Game Theory which is used to model actions of countries engaged in trade and examines the equilibrium outcomes resulting when each country is faced with the choice of engaging in bilateral free trade or tariff, or unilateral free trade or tariff. Evaluates the likely outcomes under the different scenarios that the players are absolute gains maximizers or relative gains maximizers. The Nash equilibria for these strategic games are then evaluated to determine if they are Pareto superior to other outcomes of the game. Proposes and analyses various modifications of this basic model. First, the two countries were allowed to allocate different weights to payoffs from being an absolute gains maximizer or relative gains maximizer. The Nash equilibrium of free trade obtained for the base model remained robust for most of the various modifications introduced into the model, although with restrictions on the payoff parameters in some instances. Some of these modifications include adding a negotiation cost for free trade, introducing sequential moves by countries and incomplete information. Concludes that the model provides testable hypotheses to assist in determining why defection from free trade occurs in the real world.....