World Integration, Competitive and Bargaining-Regime Switch: An Exploration.

The author considers two trading blocs that can engage in a free trade or a bargaining-dictated trade. Output is produced by several technologies that offer different substitutability between domestic and foreign inputs. Capital is allocated between the various technologies prior to the resolution of uncertainty. The switch to the bargaining equilibrium is shown to diversify country-specific supply shocks. If the bargaining costs are small, trade dependency and bargaining are exploited to allow for the diversification of national shocks. If the bargaining costs are large, countries will invest in trade-independent technologies and the incidence of bargaining will be minimized.