Policy linkage and uncertainty in international agreements

This article uses noncooperative game theory to analyze the potential benefits of linking trade agreements to agreements covering domestic policies in a world of uncertainty. I show that nonlinkage is more desirable if there is a positive probability that a country will erroneously believe that its trading partner is cheating on the agreement (triggering an unnecessary punishment phase). In contrast, linkage is more desirable if there is a positive probability that cheating will go unnoticed. (JEL F1, F13, K33, H2).