Allocation of Jurisdictional Power and Institutional Choice in the International Trade Regime and in the International Tax Regime — A Game Theory Analysis

Abstract

One of the main goals of international legal regimes is to allow countries to allocate jurisdictional power among them in an efficient way. An interesting observation in that context is that the basic structure of these allocations of jurisdictional power varies between regimes even when they share similar policy goals. This paper deals with the reasons for these differences. Specifically, it addresses the radical differences in institutional structure between the international tax regime and the international trade regime. From its inception, the international tax regime has been a bilateral framework that interacts with a unilateral domestic level. On the other hand, the international trade regime has been founded on multilateral norms from its inception. This fact is surprising given that the basic normative goal of both regimes is to promote the free flow of economic resources on the international level. This paper uses game theory and strategic policy analysis of both regimes to offer a conceptual framework that can explain this radical divergence as the result of differences in the basic strategic motivations of the players in each regime. Focusing on the strategic motivations of the players, the paper further explains some of the current key norms and concepts in both regimes. With regard to the trade regime the paper argues that the risk of strategic manipulative policy could serve as a coherent linchpin to explain the structure of the current international trade regime as a multilateral framework, as well as some of its underlying norms. In that context the paper offers an explanation of the most favored nation principle as a pillar concept in the international trade regime as well as for the concept of 'specific' subsidy and other norms in the current international trade regime. With regard to the international tax regime the paper argues that the neutrality concept, one of the key concepts in the classic economic analysis of international tax law, should be challenged by a more coherent concept of efficient allocation of the tax base. The paper further demonstrates the ability of the efficient allocation principle to explain many aspects of the current international tax regime as a bilateral framework that the classic economic analysis fails to explain.