We study how a preferential trade agreement (PTA) affects international sourcing decisions, aggregate productivity and … welfare under incomplete contracting and endogenous matching. Contract incompleteness implies underinvestment. That … from the investment. This raises aggregate productivity. On the other hand, the agreement yields sourcing diversion. More …

those suppliers it does affect, the rule increases investment, but it also induces excessive sourcing (for given investment …

investments and induces excessive sourcing within the trading bloc. From a social standpoint, the best rule binds for relatively …