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The Institutional Choice of Bilateralism and Multilateralism in International Trade and Taxation

In: International Negotiation
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  • 1 Jacobs University, Collaborative Research Center "Transformations of the State," School of Humanities and Social Sciences, P.O. Box 750 561, 28725 Bremen, Germany
  • | 2 Jacobs University, Collaborative Research Center "Transformations of the State," School of Humanities and Social Sciences, P.O. Box 750 561, 28725 Bremen, Germany
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Abstract

Trade relations are governed by a multilateral agreement, whereas the avoidance of double taxation rests on a network of about 2000 separate bilateral treaties. What accounts for the difference in the institutional form? Distinguishing between the bargaining and agreement stage of international cooperation, we first show that the institutional design of both regimes is more complex than commonly assumed. Both exhibit a mix of bilateral and multilateral bargaining that precedes multilateral agreement in trade and bilateral agreement in taxation. We demonstrate that in both regimes, governmental concerns for the distribution of benefits can best be achieved through bilateral bargaining. Multilateral bargaining serves to reduce the high transaction costs of bilateral bargains. Multilateral agreement in trade helps to overcome the problem of free-riding that results from a particular interaction of concerns on distribution and enforcement problems. Since no such problem exists in double tax avoidance, agreement is therefore bilateral in nature.

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