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Damaging Conflict: All-pay Auctions with Negative Spillovers and Bimodal Bidding

We investigate how the presence of a negative externality in an all-pay auction influences bidding behavior in the laboratory. In the standard risk-neutral model, Nash equilibrium predicts no difference in strategies between treatments with and without the externality. Our experimental results provide some support for this prediction, as average bids do not differ significantly across treatments and generally align with equilibrium benchmarks. However, bidding distributions in both treatments exhibit a pronounced bimodal pattern that is consistent with previous all-pay auction experiments but inconsistent with risk-neutral Nash predictions. To account for these features, we evaluate two models of bounded rationality, incorporating prospect theory-inspired preferences: quantal response equilibrium (QRE) and a variant on noisy introspection that we call Belief-Perturbed Logit (BPL). While both models can rationalize bimodal bidding, QRE provides the superior fit while also predicting the location of bid peaks across treatments. These results reinforce the growing evidence that while subjects may not mix strategies exactly as prescribed by Nash equilibrium, their bidding behavior remains broadly equilibrium-consistent. Our findings also support the role of reference dependence and loss aversion in explaining bimodal bidding and strategic behavior more generally

James W. Boudreau, Kristy Buzard, Timothy Mathews, Lucas Rentschler, Shane D. Sanders

Inefficient Concessions and Mediation

When two parties are engaged in conflict and each distrusts the other's ability to pursue peace, concessions can be used to indicate an interest in making peace. However, when negotiating parties are concerned that concessions could be used against them in the future, a lack of trust can prevent optimal concessions from being made. It can also reduce the possibility of peace. We use mechanism design to explore ways in which a third party mediator can act as a guarantor that promised concessions will be delivered, thereby reducing inefficiencies and increasing the potential for peace. In this process, we open up a new rationale for mediation: to increase the inefficiency of signaling in a preliminary round of negotiations.

Kristy Buzard, Ben Horne

Under Pressure: Intractable Trade Conflicts and Korea — Pneumatic Valves

The Appellate Body (AB) report in Korea–Pneumatic Valves is among the most structurally complex of recent trade remedies reports. The AB weaves a complicated web to explicate the intricacies of the relationship among the relevant provisions on injury determination in anti-dumping disputes in the midst of a contentious and long-running series of disputes between two close regional trading powers. This Article first examines the Korean investigation and its significance in economic terms. Second, it analyzes the AB's conclusions on Article 6.2 of the Dispute Settlement Understanding regarding the panel request and the significance of the AB's treatment. Third, it studies the AB's comments on the panel's anti-dumping calculations where the AB amplifies its prior pronouncements on the elements of injury and causation. Finally, the Article situates this dispute in the broader political debates playing out both at the AB and between the two disputing parties.

Kristy Buzard, Kathleen Claussen

How Trade-Restrictive Is Standardized Packaging? Economic and Legal Implications of the WTO Panel Reports in Australia–Tobacco Plain Packaging

The lengthy and long-awaited WTO Panel Reports in Australia–Tobacco Plain Packaging contain a host of material for reflection, particularly in relation to the Agreement on Technical Barriers to Trade (TBT) and the Agreement on Trade-Related Aspects of Intellectual Property Rights. While two of the Panel Reports proceed to appeal, we consider with respect to the two adopted Panel Reports the Panel's reasoning in relation to Article 2.2 of the TBT, focusing on the meaning of trade-restrictiveness. This concept central to WTO law has been under-examined to date, and these Panel Reports demonstrate some of the complexities in identifying trade-restrictive measures, particularly where they are non-discriminatory. The Panel found that Australia's measures restrict trade because they contribute to their objective of reducing tobacco consumption. Therefore, any equally effective alternative will similarly restrict trade. This curious result under TBT Article 2.2 may be particular to non-discriminatory measures that target ‘socially bad’ products such as tobacco.

Kristy Buzard, Tania Voon

Localized Knowledge Spillovers: Evidence from the Spatial Clustering of R&D Labs and Patent Citationss

Buzard et al. (2017) show that American R&D labs are highly spatially concentrated even within a given metropolitan area. We argue that the geography of their clusters is better suited for studying knowledge spillovers than are states, metropolitan areas, or other political or administrative boundaries that have predominantly been used in previous studies. In this paper, we assign patents and citations to these newly defined clusters of R&D labs. Our tests show that the localization of knowledge spillovers, as measured via patent citations, is strongest at small spatial scales and diminishes with distance. On average, patents within a cluster are about two to four times more likely to cite an inventor in the same cluster than one in a control group. Of import, we find that the degree of localization of knowledge spillovers will be understated in samples based on metropolitan area definitions compared to samples based on the R&D clusters. At the same time, the strength of knowledge spillovers varies widely between clusters. The results are robust to the specification of patent technological categories, the method of citation matching, and alternate cluster definitions.

Kristy Buzard, Gerald A. Carlino, Robert M. Hunt, Jake K. Carr, Tony E. Smith

The U.S. -- Tax Incentives Dispute: Subsidies and Investment Promotion Reaching New Heights in the Aviation Sector: The US--Tax Incentives Dispute

This paper analyzes the most recent WTO Appellate Body (AB) report in a series of disputes between the US and the EU over government support to aircraft manufacturers Boeing and Airbus. The measures under dispute in US–Tax Incentives were investment promotion subsidies provided to Boeing by the State of Washington. The EU contended that the Washington State subsidies, which were conditioned on Boeing locating production of specific parts of its new 777X program within the state, were prohibited import substitution subsidies. The AB took this case as an opportunity to consolidate WTO case-law on import substitution subsidies. It confirmed a single legal standard for export promotion and import substitution subsidies but with a stricter requirement for a finding of a violation in the case of import substitution subsidies. We argue that the AB, in allowing the subsidies to Boeing, unnecessarily blurred the distinction between contingency in law and contingency in fact by ruling that identifying a condition requiring the use of domestic inputs would be a necessary element for a determination of a de facto contingency. This appears to be an unduly formalistic view that leaves little legal space for any de facto contingency claim in the future.

Kristy Buzard, Panagiotis Delimatsis

Self-enforcing Trade Agreements and Lobbying

'In an environment where international trade agreements must be enforced via promises of future cooperation, the presence of an import-competing lobby has important implications for optimal punishments. When lobbies work to disrupt trade agreements, a Nash reversion punishment scheme must balance two conflicting objectives. Longer punishments help to enforce cooperation by increasing the government's costs of defecting, but, because the lobby prefers the punishment outcome, this also incentivizes lobbying effort and with it political pressure to break the agreement. Thus the model generates an optimal length for Nash reversion punishments, and it depends directly on the political influence of the lobbies. Trade agreement tariffs are shown to be increasing in the political influence of the lobbies, as well as their patience levels.'

The Agglomeration of American R&D Labs

We employ a unique data set to examine the spatial clustering of about 1700 private R&D labs in California and in the U.S. Northeast Corridor. Using these data, which contain the R&D labs’ complete addresses, we are able to more precisely locate innovative activity than with patent data, which only contain zip codes for inventors’ residential addresses. We avoid the problems of scale and borders associated with using fixed spatial boundaries, such as zip codes, by developing a new point-pattern procedure. Our multiscale core-cluster approach identifies the location and size of significant R&D clusters at various scales, such as a half mile, 1 mile, 5 miles, and more. Our analysis identifies four major clusters in the Northeast Corridor (one each in Boston, New York–Northern New Jersey, Philadelphia–Wilmington, and Washington, D.C.,) and three major clusters in California (one each in the Bay Area, Los Angeles, and San Diego).

Kristy Buzard, Gerald A. Carlino, Robert M. Hunt, Jake K. Carr, Tony E. Smith

Unrecognized States: A Theory of Self-Determination and Foreign Influence

Unrecognized states are characterized by stagnant or crumbling economies and political instability, often serve as havens for illicit trade, and challenge the territorial sovereignty of recognized states. Their persistence is both intellectually puzzling and normatively problematic, but unrecognized statehood can be a remarkably stable outcome, persisting for decades. Our dynamic four-player model reveals that unrecognized statehood emerges as an equilibrium outcome when a patron state is willing and able to persistently invest resources to sustain it. We assess options available to actors in the international community who seek to impose their preferred outcomes in these disputes and find that, although sanctions are the most frequently employed, they can often lead to renewed conflict instead of the intended resolution.

Kristy Buzard, Benjamin A.T. Graham, Ben Horne

Trade Agreements in the Shadow of Lobbying

This paper presents a model of international trade agreements in which the executive branches of each government negotiate agreements while the legislative branches, subject to political pressure from firms, can disrupt them. Lobbying is in the style of Grossman and Helpman's ‘Protection for Sale’ model with a new feature: all actors face uncertainty arising from the complexity of the legislative process. I demonstrate that the higher the executives set tariffs in a trade agreement, the less effort lobbies put forth to prevent its ratification. Thus trade agreements act as a domestic political commitment device: executives set relatively high tariffs to discourage lobbying and increase the chance that the agreement will be ratified. The model sheds light on the empirical puzzle surrounding governments’ welfare weights in the Grossman and Helpman model and provides a new explanation for failures to ratify trade agreements.