Asymmetric Integration

We use a standard repeated game framework and assume imperfect competition to examine how the feasibility of trade agreements is affected by the presence of asymmetries in market size, wage levels and labor productivities. The results regarding asymmetries in market size are consistent with the traditional literature: the country with the larger market is more likely to defect and transfers from the small to the large country can improve the feasibility of the trade agreement. When cost asymmetries are introduced in the model, we can identify situations in which either country is likely to defect on the agreement. In particular, the smaller and lessefficient country may not always benefit from the trade agreement and we might actually observe transfers from the more efficient to the less efficient country.