What explains the high degree of variation among trade agreements in terms of flexibility provided to member states? While previous studies have mainly focused on the demand side of flexibility, we explore the supply side. We model cooperation as a repeated game with two actors: “home government” and “foreign government”. In each period, the governments experience stochastic shocks in pressure to protect import-competing industries. The governments then simultaneously choose tariffs based on such shocks. If one state cheats in choosing a tariff above the binding, it is expected to pay compensation if and only if the complainant proves that a violation has occurred and such a violation is not allowed by flexibility provisions. The take-away point of our model is that the degree of flexibility in trade agreements depends crucially on the capacity of states to communicate sources of violations effectively. Transparent institutions allow states to distinguish among violations that come from free-riding behaviors and violations that come from negative shocks for which governments have no responsibility. Concretely, our model provides the following predictions: 1) higher levels of transparency increase the likelihood of full compliance, while higher levels of flexibility lower the likelihood of full compliance; 2) higher levels of transparency reduce stability, whereas higher flexibility increases stability; 3) controlling for the total level of cooperative benefits that are achievable by treaty members: high levels of transparency will be associated with increased flexibility. Our study contributes to the literature on international cooperation and the political economy of international trade.
