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Vulnerable Trade: The Dark Side Of An Edgeworth Box, Charles Anderton, John Carter

Economics Department Working Papers

We examine incentives to seize and defend goods offered for trade in an Edgeworth box economy. Appropriation possibilities generate an equilibrium of coerced redistribution and voluntary trade in a reduced box. Potential mutual gains remain untaken because the prospect of piracy creates a price wedge, wherein the effective relative price is lowered for the exporter and raised for the importer. As the vulnerability of one or both goods increases, the price wedge widens, causing trade to diminish. If vulnerability becomes sufficiently high, then trade and appropriation are driven to zero, or one or both players are rendered indifferent to trade.