present.<sup>60</sup> Bond and Beshkar (2012) o¤er a ...rst example of this modeling approach. They analyze a partial-equilibrium model with asymmetric country sizes that features costly state veri...cation, in the speci...c sense that at a cost the importing government can publicly verify the welfare weight that determines its type. A novel feature of their model is that both caps and escape clauses are endogenously determined as part of an optimal trade agreement. Interestingly, they ...nd that circumstances under which the possibilities of overhang (downward ‡exibility) and escape (upward ‡exibility) co-exist are relatively rare. Intuitively, when higher types use the escape clause, the cap can be set at a lower level; and this implies in turn that the likelihood of overhang is small.

An alternative theory of escape clauses dispenses with the possibility of private information and focuses instead on the self-enforcement constraints that underlie any cooperative trade agreement. Bagwell and Staiger (1990) o¤er a ...rst paper of this kind. They consider a partial-equilibrium model with two countries, in which publicly observed trade-volume shocks occur in an iid fashion over time. When a country imports a large volume, it has an increased incentive to cheat on a cooperative agreement and select its unilaterally optimal tari¤. The cost of such behavior is that it may induce governments to abandon cooperation and revert to Nash trade policies in the future. If governments maximize national income and are su¢ ciently patient, then they can enforce free-trade policies for all possible trade-volume shocks. If governments have moderate patience, however, then they can enforce free-trade policies only in periods with low trade volumes. When trade volumes take higher values, the incentive to cheat is acute at free-trade policies and the gains from defection overwhelm the discounted future cost of initiating a Nash trade war. Governments with moderate patience can still cooperate in the presence of large trade volume shocks, but they do so by setting positive (and below-Nash) tari¤s. Intuitively, by cooperating with a positive tari¤, governments reduce the incentive to cheat and bring it back in line with the future discounted cost of Nash reversion. The positive tari¤s that accompany high trade-volume shocks can be interpreted in terms of an escape clause, and Bagwell and Staiger show that an escape clause of this kind is a feature of an optimal self-enforcing trade agreement for governments with moderate patience.<sup>61</sup> Bown and Crowley (2013a) provide a ...rst empirical investigation of the cross-sectional and intertemporal predictions of the Bagwell-Staiger (1990) model. As discussed, that model predicts that an import tari¤ increase is more likely when the import volume increases. In addition, conditioning on a positive import surge, the model predicts that the probability of a tari¤ increase is positively associated with less elastic import demand and export supply functions and also with less variable import demand volumes. Since the escape clause featured in the Bagwell-Staiger model could correspond to any instrument of special protection, such as a safeguard tari¤ or an anti-dumping duty, Bown and Crowley analyze the model’s predictions using data on US import tari¤ increases arising under the US antidumping and safeguard laws and ...nd strong support for the predictions of the Bagwell-Staiger model.

A special feature of the Bagwell-Staiger (1990) model is that trade-volume shocks are iid through

> 60 As Sykes (2003) discusses, however, the extent to which the WTO Agreement on Safeguard s and subsequent legal cases serve to articulate a clear set of contingencies may be questioned.

> 61 Their work builds on methods developed by Rotemberg and Saloner (1986) for the study of collusion.

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