This paper seeks to understand the factors that cause disputes at the World Trade Organization to move from the negotiation stage to the panel stage. We hypothesize that transfer payments between states are costly to arrange and that the lowest-cost transfers are those that relate directly to the issue in dispute. This implies that when the subject matter of the dispute has an all-or-nothing character and leaves little room for compromise (for example, health and safety regulations), the

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... ' ability to reach an agreement through the use of transfers is restricted. In contrast, if the subject matter of dispute permits greater flexibility (for example, tariff rates), the parties can more easily structure appropriate transfer payments through adjustments to the disputed variable. We conduct an empirical test of this hypothesis, finding support for it among democratic states.