Myopic or farsighted: Bilateral Trade Agreements among three symmetric countries

Discussion Papers


by TSUBOTA Kenmei and KAWASAKI Yujiro

January 2011


We examine network formation via bilateral trade agreement (BTA) among three symmetric countries. Each government decides whether to form a link or not via a BTA depending on the differential of ex-post and ex-ante sum of real wages in the country. We model the governmental decision in two forms, myopic and farsighted and analyze the effects on the BTA network formation. First, we find that both
myopic and farsighted games never induce the formation of star networks nor empty networks. Second, the networks resulting from myopic game coincides with those resulting from farsighted games.

Keywords: Endogenous network formation, Bilateral trade agreement, Myopic and farsighted behavior,
JEL classification: F15

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