Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-09T13:16:46.024Z Has data issue: false hasContentIssue false
  • English
  • Français

Costly Adjustments, Markets and International Reassurance

Published online by Cambridge University Press:  06 March 2012

Johannes Urpelainen
Get access Rights & Permissions [Opens in a new window]

Abstract

Two leaders engaged in international co-operation must each build trust by credibly signalling that they will not exploit the other by defecting at the implementation stage. Previous research does not reveal the difficulty and cost of such international reassurance. The role that costly adjustments by markets play in international reassurance is analysed, showing that fully efficient information revelation can be achieved when market actors under intense competitive pressures undergo sufficiently costly adjustments in expectation of international co-operation. ‘Nice’ leaders can reveal their true preferences simply by saying they intend to co-operate, because ‘mean’ leaders are unwilling to mislead market actors into undergoing futile costly adjustments. However, market imperfections prevent full information revelation unless market actors prefer international co-operation to the status quo.

Type
Research Article
Information
British Journal of Political Science , Volume 42 , Issue 3 , 01 June 2012 , pp. 679 - 704
Copyright
Copyright © Cambridge University Press 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

1 Kydd, Andrew H., ‘When Can Mediators Build Trust?’ American Political Science Review, 100 (2006), 449–462CrossRefGoogle Scholar.

2 Fearon, James D., ‘Domestic Political Audiences and the Escalation of International Disputes’, American Political Science Review, 88 (1994), 577–592CrossRefGoogle Scholar; Gartzke, ErikLi, Quan and Boehmer, Charles, ‘Investing in Peace: Economic Interdependence and International Conflict’, International Organization, 55 (2001), 391–438CrossRefGoogle Scholar; Kydd, Andrew H., ‘Trust, Reassurance, and Cooperation’, International Organization, 54 (2000), 325–357CrossRefGoogle Scholar.

3 Fearon, ‘Domestic Political Audiences and the Escalation of International Disputes’; Fearon, James D., ‘Signaling Foreign Policy Interests: Tying Hands versus Sinking Costs’, Journal of Conflict Resolution, 41 (1997), 68–90CrossRefGoogle Scholar; Gartzke, Li and Boehmer, ‘Investing in Peace: Economic Interdependence and International Conflict’; Smith, Alastair, ‘International Crises and Domestic Politics’, American Political Science Review, 92 (1998), 623–638CrossRefGoogle Scholar.

4 Little, IanScitovsky, Tibor and Scott, Maurice, Industry and Trade in Some Developing Countries: A Comparative Study (New York: Oxford University Press, 1970)Google Scholar; Nsouli, Saleh M.Rached, Mounir and Funke, Norbert, ‘The Speed of Adjustment and the Sequencing of Economic Reforms’, International Journal of Social Economics, 32 (2005), 740–766CrossRefGoogle Scholar.

5 Fischer, Carolyn and Newell, Richard G., ‘Environmental and Technology Policies for Climate Mitigation’, Journal of Environmental Economics and Management, 55 (2008), 142–162CrossRefGoogle Scholar; Stern, Nicholas, The Economics of Climate Change: The Stern Review (Cambridge: Cambridge University Press, 2006)Google Scholar.

6 Bruce Bueno de, Mesquita, Smith, AlastairSiverson, Randolph M. and Morrow, James D., The Logic of Political Survival (Cambridge, Mass.: MIT Press, 2003)Google Scholar; Gartzke, Li and Boehmer, ‘Investing in Peace: Economic Interdependence and International Conflict’; Grossman, Gene M. and Helpman, Elhanan, Special Interest Politics (Cambridge, Mass.: MIT Press, 2001)Google Scholar.

7 Axelrod, Robert and Keohane, Robert O, ‘Achieving Cooperation Under Anarchy: Strategies and Institutions’, World Politics, 38 (1985), 226–254CrossRefGoogle Scholar; Fearon, James D., ‘Bargaining, Enforcement, and International Cooperation’, International Organization, 52 (1998), 269–305CrossRefGoogle Scholar; Kydd, ‘Trust, Reassurance, and Cooperation’.

8 In this article, I follow Kydd, ‘Trust, Reassurance, and Cooperation’ in deliberately abstracting away from all other enforcement and commitment problems in international co-operation.

9 The domestic political foundations of leader preferences will be discussed in greater detail in the model section.

10 Fearon, ‘Domestic Political Audiences and the Escalation of International Disputes’; Smith, ‘International Crises and Domestic Politics’.

11 Kurizaki, Shuhei, ‘Efficient Secrecy: Public versus Private Threats in Crisis Diplomacy’, American Political Science Review, 101 (2007), 543–558CrossRefGoogle Scholar, p. 544.

12 Fearon, ‘Domestic Political Audiences and the Escalation of International Disputes’.

13 Smith, ‘International Crises and Domestic Politics’.

14 Glaser, Charles L., ‘The Security Dilemma Revisited’, World Politics, 50 (1997), 171–201CrossRefGoogle Scholar; Hoffman, Aaron M., Building Trust: Overcoming Suspicion in International Conflict (Albany: State University of New York Press, 2006)Google Scholar; Kydd, ‘Trust, Reassurance, and Cooperation’; Larson, Deborah Welch, ‘Crisis Prevention and the Austrian State Treaty’, International Organization, 41 (1987), 27–60CrossRefGoogle Scholar; Stein, Janice Gross, ‘Reassurance in International Conflict Management’, Political Science Quarterly, 106 (1991), 431–451CrossRefGoogle Scholar.

15 Kerner, Andrew, ‘Why Should I Believe You? The Costs and Consequences of Bilateral Investment Treaties’, International Studies Quarterly, 53 (2009), 73–102CrossRefGoogle Scholar.

16 Whalley, John, ‘Recent Regional Agreements: Why So Many, Why So Much Variance in Form, Why Coming So Fast, and Where Are They Headed?’ World Economy, 31 (2008), 517–532CrossRefGoogle Scholar.

17 Dangerfield, Martin, Subregional Economic Cooperation in Central and Eastern Europe: The Political Economy of CEFTA (Northampton: Edward Elgar, 2000)Google Scholar, p. 29.

18 Avery, Graham and Cameron, Fraser, The Enlargement of the European Union (Sheffield: Sheffield Academic Press, 1998)Google Scholar, p. 20.

19 ‘Energy and climate change: Towards an integrated EU policy’, EurActive, 6 July 2009.

20 Uusi-Rauva, Christa, ‘The EU Energy and Climate Package: A Showcase for European Environmental Leadership?’ Environmental Policy and Governance, 20 (2010), 73–88CrossRefGoogle Scholar.

21 Cited in Uusi-Rauva, ‘The EU Energy and Climate Package’, p. 73.

22 Fearon, James. D., ‘Rationalist Explanations for War’, International Organization, 49 (1995), 379–414CrossRefGoogle Scholar.

23 Fearon, ‘Signaling Foreign Policy Interests’.

24 Fearon, ‘Domestic Political Audiences and the Escalation of International Disputes’; Gartzke, Erik and Li, Quan, ‘War, Peace, and the Invisible Hand: Positive Political Externalities of Economic Globalization’, International Studies Quarterly, 47 (2003), 561–586CrossRefGoogle Scholar; Smith, ‘International Crises and Domestic Politics’.

25 Gartzke, Li and Boehmer, ‘Investing in Peace: Economic Interdependence and International Conflict’.

26 Kydd, ‘Trust, Reassurance, and Cooperation’.

27 Mansfield, Edward D. and Pevehouse, Jon C., ‘Democratization and International Organizations’, International Organization, 60 (2006), 137–167CrossRefGoogle Scholar.

28 Neumayer, Eric and Spess, Laura, ‘Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?’ World Development, 33 (2005), 1567–1585CrossRefGoogle Scholar.

29 Thompson, Alexander, ‘Coercion through IOs: The Security Council and the Logic of Information Transmission’, International Organization, 60 (2006), 1–34CrossRefGoogle Scholar.

30 Feltovitch, NickHarbaugh, Richmond and To, Ted, ‘Too Cool for School? Signalling and Countersignalling’, RAND Journal of Economics, 33 (2002), 630–649CrossRefGoogle Scholar.

31 Kydd, ‘Trust, Reassurance, and Cooperation’.

32 Neumayer and Spess, ‘Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?’

33 Thompson, ‘Coercion through IOs’.

34 Guzman, Andrew T., How International Law Works: A Rational Choice Theory (New York: Oxford University Press, 2008)CrossRefGoogle Scholar; Tomz, Michael, Reputation and International Cooperation: Sovereign Debt Across Three Centuries (Princeton, N.J.: Princeton University Press, 2007)Google Scholar.

35 Downs, George W. and Jones, Michael A., ‘Reputation, Compliance, and International Law’, Journal of Legal Studies, 31 (2002), 95–114CrossRefGoogle Scholar.

36 Haas, Ernst B., ‘Why Collaborate? Issue-linkage and International Regimes’, World Politics, 32 (1980), 357–405CrossRefGoogle Scholar; Sebenius, James K., ‘Negotiation Arithmetic: Adding and Subtracting Issues and Parties’, International Organization, 37 (1983), 281–316CrossRefGoogle Scholar; Stein, Arthur A., ‘The Politics of Linkage’, World Politics, 33 (1980), 62–81CrossRefGoogle Scholar; Tollison, Robert D. and Willett, Thomas D., ‘An Economic Theory of Mutually Advantageous Issue Linkages in International Negotiations’, International Organization, 33 (1979), 425–449CrossRefGoogle Scholar.

37 Axelrod and Keohane, ‘Achieving Cooperation Under Anarchy’; Keohane, Robert O., ‘Reciprocity in International Relations’, International Organization, 40 (1986), 1–27CrossRefGoogle Scholar; Urpelainen, Johannes, ‘Domestic Reform as a Rationale for Gradualism in International Cooperation’, Journal of Theoretical Politics, 23 (2011), 400–427CrossRefGoogle Scholar.

38 Rathbun, Brian C., ‘Before Hegemony: Generalized Trust and the Creation and Design of International Security Organizations’, International Organization, 65 (2011), 243–273CrossRefGoogle Scholar.

39 Little, Scitovsky and Scott, Industry and Trade in Some Developing Countries; Nsouli, Rached and Funke, ‘The Speed of Adjustment and the Sequencing of Economic Reforms’.

40 Bailey, Michael A.Goldstein, Judith and Weingast, Barry, ‘The Institutional Roots of American Trade Policy: Politics, Coalitions, and International Trade’, World Politics, 49 (1997), 309–338CrossRefGoogle Scholar; Rodrik, Dani, ‘Why Do More Open Economies Have Bigger Governments?’ Journal of Political Economy, 106 (1998), 997–1032CrossRefGoogle Scholar.

41 Kerner, ‘Why Should I Believe You?’

42 Fischer and Newell, ‘Environmental and Technology Policies for Climate Mitigation’; Stern, The Economics of Climate Change.

43 Schumpeter, Joseph A., The Theory of Economic Development (Cambridge, Mass.: Harvard University Press, 1934)Google Scholar; Smith, Adam, An Inquiry into the Nature and Causes of the Wealth of Nations (Chicago: University of Chicago Press, 1977 [1776])CrossRefGoogle Scholar.

44 For analytical tractability, I ignore possibility that costly adjustments are profitable even if only one leader co-operates.

45 Technically, asymmetric costs and benefits could be modelled as a distribution over the unit interval.

46 Kydd, ‘Trust, Reassurance, and Cooperation’.

47 Gilligan, Michael J., Empowering Exporters: Reciprocity, Delegation, and Collective Action in American Trade Policy (Ann Arbor: University of Michigan Press, 1997)CrossRefGoogle Scholar; Helen V. Milner,Resisting Protectionism: Global Industries and the Politics of International Trade (Princeton, N.J.: Princeton University Press, 1988)Google Scholar.

48 Aidt, Toke S., ‘Political Internalization of Economic Externalities and Environmental Policy’, Journal of Public Economics, 69 (1998), 1–16CrossRefGoogle Scholar; Sprinz, Detlef and Vaahtoranta, Tapani, ‘The Interest-Based Explanation of International Environmental Policy’, International Organization, 48 (1994), 77–105CrossRefGoogle Scholar.

49 Vasi, Ion Bogdan, ‘Social Movements and Industry Development: The Environmental Movement's Impact on the Wind Energy Industry’, Mobilization, 14 (2009), 315–336Google Scholar.

50 Hathaway, Oona A., ‘Positive Feedback: The Impact of Trade Liberalization on Industry Demands for Protection’, International Organization, 52 (1998), 575–612CrossRefGoogle Scholar; Urpelainen, Johannes, ‘Regulation under Economic Globalization’, International Studies Quarterly, 54 (2010), 1099–1121CrossRefGoogle Scholar.

51 Oye, Kenneth A. and Maxwell, James H., ‘Self-Interest and Environmental Management’, Journal of Theoretical Politics, 6 (1994), 593–624CrossRefGoogle Scholar.

52 Kydd, ‘Trust, Reassurance, and Cooperation’.

53 Kydd, ‘Trust, Reassurance, and Cooperation’.

54 Thompson, ‘Coercion through IOs’.

55 ‘EU climate package explained’, BBC, 26 November 2009. Available at http://news.bbc.co.uk/2/hi/7765094.stm, accessed on 13 February 2012.

56 Crawford, Vincent P. and Sobel, Joel, ‘Strategic Information Transmission’, Econometrica, 50 (1982), 1431–1451CrossRefGoogle Scholar.

57 In what follows, it is important to recall that all results are specific to this particular equilibrium. The game has other equilibria, such as those do not involve any cheap talk by the leaders, but here I focus only on finding an optimal equilibrium that minimizes the cost of co-operation.

58 The number of market actors is large, so a deviation by any individual market actor is ignored by both leaders.

59 Mansfield and Pevehouse, ‘Democratization and International Organizations’.

60 Gartzke, Li and Boehmer, ‘Investing in Peace: Economic Interdependence and International Conflict’.

61 Gartzke, Li and Boehmer, ‘Investing in Peace: Economic Interdependence and International Conflict’.

62 Grossman, Sanford J. and Stiglitz, Joseph E., ‘On the Impossibility of Informationally Efficient Markets’, American Economic Review, 70 (1980), 393–408Google Scholar; Hayek, Friedrich A., The Constitution of Liberty (Chicago: University of Chicago Press, 1960)Google Scholar.

63 Pierson, Paul, ‘The Limits of Design: Explaining Institutional Origins and Change’, Governance, 13 (2000), 475–499CrossRefGoogle Scholar.

64 REN21, Renewables Global Status Report: 2009 Update (Paris: REN21 Secretariat, 2009).

65 Fischer and Newell, ‘Environmental and Technology Policies for Climate Mitigation’; Stern, The Economics of Climate Change.

66 Barrett, Scott, ‘The Coming Global Climate-Technology Revolution’, Journal of Economic Perspectives, 23 (2009), 53–75CrossRefGoogle Scholar.

67 Guri Bang, Camilla Bretteville Froyn, Jon Hovi and Fredric C. Menz, ‘The United States and International Climate Cooperation: International ‘Pull’ versus Domestic ‘Push’, Energy Policy, 35 (2007), 1282–91.

68 See http://www.wildershares.com, accessed 6 April 2011.

69 Unrelated to climate co-operation, both indices plummeted in the middle of 2008 due to the global financial crisis.

70 ‘Carbon markets give cautious welcome to Bali deal’, Carbon Finance, 20 December 2007.

71 ‘Five-nation Copenhagen Accord: No clear signal to markets’, Wind Power Monthly, 18 December 2009.

72 Gray, Julia, ‘International Organization as a Seal of Approval: European Union Accession and Investor Risk’, American Journal of Political Science, 53 (2009), 931–949Google Scholar, pp. 933–4.

73 Hart, Oliver and Moore, John, ‘Incomplete Contracts and Renegotiation’, Econometrica, 56 (1988), 755–785CrossRefGoogle Scholar.

74 Grossman, Gene M. and Helpman, Elhanan, ‘Protection for Sale’, American Economic Review, 84 (1994), 833–850Google Scholar.

75 Bechtel, Michael M. and Schneider, Gerald, ‘Eliciting Substance from “Hot Air”: Financial Market Responses to EU Summit Decisions on European Defense’, International Organization, 64 (2010), 199–223CrossRefGoogle Scholar.

76 Bechtel and Schneider, ‘Eliciting Substance from “Hot Air”’.

77 Finding an example of a monopolist actively preventing reassurance would be difficult. If reassurance is expected to fail, the leaders have no incentive to try to reveal information. Thus, the monopolist's attempt to prevent reassurance would remain ‘off the equilibrium’.

78 Bueno de Mesquita, Smith, Siverson and Morrow, The Logic of Political Survival.

79 Kydd, ‘Trust, Reassurance, and Cooperation’.

80 Axelrod and Keohane, ‘Achieving Cooperation Under Anarchy’; Fearon, ‘Bargaining, Enforcement, and International Cooperation’.

81 Axelrod and Keohane, ‘Achieving Cooperation Under Anarchy’; Fearon, ‘Bargaining, Enforcement, and International Cooperation’.

82 Garrett, Geoffrey, ‘Global Markets and National Politics: Collision Course or Virtuous Circle?’ International Organization, 52 (1998), 787–824CrossRefGoogle Scholar.

83 Gartzke, Erik, ‘The Capitalist Peace’, American Journal of Political Science, 51 (2007), 166–191CrossRefGoogle Scholar.