outcomes of WTO disputes.

Like other studies of WTO dispute settlement, our coefficient estimates could potentially be impacted by selection bias. Intuitively, disputes arise not at random but rather are chosen strategically by the complainant country, and to the degree that the unobserved characteristics that determine this selection are correlated with the error in our equation, our coefficients could be biased. Some of these concerns are addressed by our focus on a theoretically-motivated model and our inclusion of additional control variables likely associated with the selection process; these include the economic size of the complainant and respondent countries. Nevertheless, unaddressed selection concerns may remain.

In the next sub-section we introduce the data and construction of variables used in the estimation. We then discuss endogeneity issues associated with estimating equation (12) and our particular instrumental variables approach to address these concerns.

# **4.1 Construction of WTO dispute sample**

We begin with a population of 347 formal bilateral (complainant-respondent) WTO disputes that were initiated and legally concluded between 1995 and 2009.<sup>19</sup> We start with 1995 as that was the first year that the WTO and its formal Dispute Settlement Understanding was in effect, and we conclude in 2009 as we require two years of post-dispute trade data with which to observe potential changes in trade volumes resulting from the dispute settlement negotiations. We expand the WTO dispute database of Horn and Mavroidis (2008) by adding disputes from more recent years as well as details on the policies and traded products under dispute, as now made available in the data set accompanying Bown and Reynolds (2015).

Figure 1 presents a timeline of the policy changes associated with the dispute settlement process and the means by which we map the timing of the theory to the dispute settlement data. The first year of interest is the “best response” year, or the first full year that the respondent country has in place the policy that is ultimately the subject of the WTO dispute. In Figure 1, _t_ = _BR_ is given by period 3, and it occurs one year after the alleged WTO-violating policy was first imposed. In most instances, the year of imposition of the best response policy is available from either official WTO dispute documentation or from other official government notifications. However, 17 percent of the disputes in the sample are initiated _without_ such a policy change being relevant. To clarify, it is not that the date of the policy change is unobservable, it is simply that the WTO dispute arises under the allegation that the respondent has _failed_ to change its policy so as to bring itself into compliance with basic WTO obligations undertaken either at the end of the Uruguay Round or under the terms of its accession. In these cases, we define _t_ = _BR_ simply to be the year of the

> 19Overall, members filed 402 WTO disputes between 1995 and 2009. However, 55 disputes were associated with alleged policy violations that were still in force as of 2009. Because our model examines a setting in which enforcement negotiations take place bilaterally, we define our unit of observation as a complainant-respondent pair. Therefore, we further clean the population of redundant disputes (i.e., a complainant filing multiple disputes against the same respondent country over the same issue) and break into bilateral pairings any instances in which multiple complainants jointly file a dispute against a common respondent over the same issue.

12