Quality of governance and the formation of preferential trade agreements

This paper investigates economic and political factors which explain the presence or absence of preferential trade agreements (PTAs). A model of three countries with imperfect competition markets is employed for theoretical analysis of political economy. The validity of theoretical results is tested by econometric analysis with a logit model. It is shown that countries with similar incomes are more likely to form PTAs, and that governments with low quality of governance have little incentive to form PTAs.