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 …

We propose a theory of ex post inefficient renegotiation that is based on loss aversion. When two parties write a long … renegotiated outcome sticky and materially inefficient. The theory has important implications for the optimal design of long …