Farsighted free trade networks

The paper examines the strategic stability and the e¢ ciency of free trade networks. We reconsider the endogenous tari¤ model introduced by Goyal and Joshi (2006). Di¤erent from their analysis with myopic countries, we adopt a new solution concept, pairwise farsighted stable set (Herings, Mauleon and Vannetelbosch, 2009, GEB), to examine the formation of free trade agreements (FTAs) as a network formation game among farsighted countries. Our principal …nding shows that, the global free trade network is pairwise farsightedly stable, con…rming the consistency between bilateralism and multilateralism. We also explore the e¢ ciency and uniqueness of the complete global free trade network.