Essays on Preferential Trade Agreements Under Uncertainty

This dissertation studies the formation of preferential trade agreements using a coalition formation approach in both certain and uncertain frameworks. It is at the intersection of international trade and cooperative game theory. In chapter 2 we consider a three-country model of oligopoly and trade under demand uncertainty. We endogenize the coalition structure that forms in a three stage game. We find that for small volatilities countries prefer global free trade. The more positively correlated two countries are the more likely they are to form a customs union. We also find that countries may wish to stand alone under certain variance-covariance configurations. In chapter 3 we add exogenous trade costs under both certainty and uncertainty. We find that trade costs critically affect choice of output by firms and choice of tariffs and coalitions by governments. With symmetric trade costs as trade costs vary we find different coalitions forming in equilibrium. The introduction of demand uncertainty affects coalition choices by changing the cutoff trade costs at which a country may be indifferent between two different coalitions. Further, coalitions that may form under certainty or low uncertainty may not form with high uncertainty. On the other hand under different configuration of trade costs coalitions that may not be feasible under certainty may be shown to be possible under uncertainty. In both cases, as long as trade costs are not prohibitive, as volatility in every market increases without bound, we get global free trade with probability one. As a special case we show that under certain conditions two geographically distant countries may choose to form a coalition excluding a nearby country if the market volatility and correlation between partner countries is high enough.

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