Sunday, May 29, 2011

Andrei Shleifer and Robert W. Vishny. 1993. Corruption

Andrei Shleifer and Robert W. Vishny. 1993. "Corruption." Quarterly Journal of Economics 108 (3): 599-617.
  • Corruption
    • Corruption is the sale by government officials of government property for personal gain.
    • Corruption without theft occurs when the government sets a price p for a good, such as a license, but the the official charges a price greater than p, turns over the official price to the government and keeps the excess.
    • Corruption with theft occurs when the official makes a sale for the good at any price and doesn't turn p over to the government.
  • Market forces at work
    • Profit maximizing incentives of government officials: those who would pay most to be an official get to be an official + those who can pay the most are those that can collect the most bribes = maximal bribes collected 
    • Buyers want to be more competitive in the market. When there is corruption without theft, buyers can reduce the cost of goods that officials sell through bribery.
  • Role of agency organization
    • If there is just one agency selling different complementary goods, a joint monopolist, then it can strategize so that the low price of one good spurs the demand for a complementary good. The agency extracts greater rents this way. 
    • When different agencies with different jurisdictions operate independently when selling complementary goods, each agency will sell its respective good at the monopoly price. The cost becomes exorbitant for the buyer who must buy all complementary goods in order to operate and fewer goods will be purchased in comparison to when there is a joint monopolist. 
    • When agencies have overlapping jurisdictions (redundancy), then there is competition and there will be minimal to no corruption because buyers can just find the agency that charges the lowest price. 
  • The role of secrecy in corruption
    • Agency efforts to avoid detection of its corruption and subsequent punishment causes corruption to be more distortionary than taxation. Government officials will use their power to induce substitution into the goods on which bribes can be more easily collected without detection, such as banning certain imports.
      • The menu of goods in available in a country is determined by corruption opportunities rather than tastes or technological needs.
    • A cap is put on the number of people who are involved in giving and receiving bribes in order to maintain secrecy, which contributes to a hostility to newcomers, which inhibits change and innovation. Economic growth suffers as a result.

Tuesday, May 24, 2011

Edward A. Parson. 1993. Protecting the Ozone Layer

Edward A. Parson. 1993. "Protecting the Ozone Layer." In Institutions for the Earth: Sources of Effective International Environmental Protection. Peter M. Haas, Robert O. Keohane and Marc A. Levy, eds. Cambridge: MIT Press, 27-73.

This chapter traces the history of international action on the ozone layer and national ratifications and responses, and analyzes the determinants of the international agenda and action, in particular the influence of international institutions on the outcomes. 

  • Late 1970s: 
    • United States regulators ban CFC aerosols except for a few essential uses since aerosol sprays were regarded as a frivolous and expendable use. Other countries that did similarly include: Canada, Sweden, and Norway. 
    • First significant international initiate of ozone took place: a UN Environment program-sponsored (UNEP) Washington meeting in March 1977, with representatives from thirty-three nations and the Commission of the European Community (EC).
  • Late 1970s and early 1980s:
    • Anti-regulatory pressure from industries encouraged deadlock on discussions regarding controls. Growth and new application markets for chlorofluorocarbons (CFCs) reversed the declines in CFCs that followed the aerosol bans. U.S. and world production surpassed their pre-ban levels in 1984.
    • Research into substitutes for CFCs stopped in the early 1980s.
  • Late 1980s:
    • Research into substitutes for CFCs resumed. Hydrofluorocarbons (HFCs) and hydrochlorofluorocarbions (HCFCs) were more difficult and expensive to manufacture. HFCs caused no ozone depletion. HCFCs and HFCs both contributed 
    • Bills introduced in the United States in during 1987 called for unilateral CFC cuts by the United States and trade restrictions against countries who did not reciprocate. 
    • The end of international negotiations in Montreal in September 1987 results in, among other things:
      • 50 percent cuts from 1986 levels of production and consumption of five principal CFCs by 1999, with interim controls consisting of a freeze in 1990 and a 20 percent cut in 1994.
      • several restrictions on trade with non-parties; bulk imports of restricted substances from non-parties were prohibited in 1990; bulk exports were prohibited from 1993; imports from non-parties of products containing controlled substances were banned (with the possibility of opting out by formal objection) from 1992. 
      • parties pooling information about the effect of CFCs and agreeing to meet at regular 4-year intervals. 
    • In 1988, the EPA, European industry council, the Imperial Chemical Industries, and a major CFC producer Dupont all endorsed a phaseout of CFCs. 
    • In May 1989 in Helsinki, 80 nations signed an endorsement of phaseout by 2000.
  • Determinants of agenda and international decisions:
    • Information and the certainty of the science
      • Lack of information resulted in innocuous measures. 
      • Science defined key elements of the negotiating agenda.
    • Public and media attention
    • United States leadership on the issue from early 1986
    • Assessment panels provided a channel for science to feed directly into the negotiation process from a forum with the stamp of international objectivity and authoritativeness.
  • Altering state behavior: what did the institutions do?
    • Institutions advanced the process by building concern and improving the contractual environment. 
    • International institutions developed capacity to cut CFCs where it did not formerly exist and provided incentives to laggards. Trade sanctions were decisive in some countries' decision to join and in the energetic compliance by non-parties such as Taiwan and Korea. 
    • International institutions limited spurious scientific disagreement as a tactic to obstruct negotiations, increased the general level of concern and urgency, and provided formal standing for Tolba (executive director of the UNEP), enabling him to exercise strong personal leadership.
    •  Institutional changes concerning meetings, expert assessment, and treaty review ere of decisive importance for realizing stronger controls in 1990s. 

Monday, May 23, 2011

S. J. Liebowitz and Stephen E. Margolis. 1995. Path Dependence, Lock-In, and History

S. J. Liebowitz and Stephen E. Margolis. 1995. "Path Dependence, Lock-In, and History." Journal of Law, Economics, and Organization 11(1): 205-26.

  1. First-degree path dependence- sensitivity to starting points exist but has no implied inefficiency
  2. Second-degree path dependence- sensitive dependence on initial conditions and imperfect information leads to outcomes that are regrettable and costly to change. Outcome is not inefficient in any meaningful sense and the paths taken cannot be improved upon given the assumed limitations on knowledge.
  3. Third-degree path dependence- sensitive dependence on initial conditions leads to an outcome that is inefficient, but the outcome is remediable.

Some deficiency in information is required for lock-in to an inferior technology to occur. In order for third-degree lock-in to occur, there must be agents who know enough to make correct choices but who fail to take advantage of the implied profit opportunities, and at the same time, adopters who generally know nothing more than the payoff going to the next adopter.

Path dependence literature elevates the importance of a historical chronicle relative to other methods of explanations—outcomes depend critically on insignificant and unpredictable events rather than on underlying conditions such as endowments and technology.

Roger G. Noll. 1989. Economic Perspectives on the Politics of Regulation

Roger G. Noll. "Economics Perspectives on the Politics of Regulation," In R.D. Willig and R. Schmalensee, eds. Handbook of Industrial Organization, Vol. 2, North-Holland (1989): 1254-1287.

This chapter surveys the research on the political causes of regulatory policy.

Public interest theory - the view that, as a matter of positive theory, the normative goal of curing market failures animates the choice of regulatory policies.
  • Assumptions:
    1. Regulation is adopted only in the presence of genuine market failure
    2. At the time, regulation is the best available policy instrument
    3. Regulation does not persist once it begins to impose costs greater than the efficiency gained.
  • How regulation can act to the benefit of the public:
    1. Government regulation corrects market failures. 
    2. Information pertinent to identifying market failures is most cheaply acquired and disseminated by government. 
    3. Governments may be able to correct market failures with lower transaction costs than direct negotiation between producers and sufferers. 
Agency relationships mediate the relationship between the policy preferences of citizens and the policy outcomes pursued by agencies.
  • The degree to which agents comply with the preferences of principals depends on: 
    1. The extent to which principals and agents have conflicts of interest
    2. Tthe costs and accuracy of methods for principals to monitor the performance of agents
    3. The power of the principals; enforcement mechanisms for redirecting the incentives of the agent. 
  • If a single interest group is effectively organized, the result is Stigler's simple "capture"—the one organized group will tend to be monopoly or cartel that is protected by regulators. 
  • Theoretically, regulation will depart from efficiency only when it is necessary to create and divide rents among represented interest. Departure of regulation from efficiency is constrained by:
    1. Political entrepreneurs who can effectively pay the organization costs of an unrepresented group.
    2. Technological change and rising incomes that can cause previously unrepresented interests to eventually have sufficient stakes in a particular domain of regulation to become represented in it.
  • Difficulties in controlling the behavior of regulatory agencies: 
    1. Agencies can engage in shirking
    2. Agency officials may have their own political agenda 
    3. Agency personnel may b motivated by personal career objectives 
    4. Agencies may be populated by professionals who have a narrow or uninformed perception of how to achieve public interest objectives.

Sunday, May 22, 2011

W. Kip Viscusi, John M. Vernon, Joseph E. Harrington, Jr. 2000. Introduction to Economic Regulation

W. Kip Viscusi, John M. Vernon, Joseph E. Harrington, Jr. "Introduction to Economic Regulation," in W. Kip Viscusi, John M. Vernon, and Joseph E. Harrington, Jr. Economics of Regulation and Antitrust, 3rd ed. (Cambridge, MA: MIT Press, 2000), pg. 297-336

Regulation - a state imposed limitation on the discretion that may be exercised by individuals or organizations, which is supported by threat of sanction.

Variables controlled by regulation:
  1. Price
    • Imposition of a single price
    • Specification of a price structure
  2. Quantity
    • With price regulation
    • Without price regulation
  3. Number of Firms
    • Restrictions on entry and exit
  4. Quality
  5. Firm investment

Theory of Regulation - why is there regulation? / Hypotheses about empirical regularities 
  1. Public Interest Theory - also known as normative analysis as a positive theory (NPT) - government regulates to correct market failures.
    • Inconsistent with empirical evidence where firms supported or lobbied for regulation and where industries are regulated despite lack of market failure.
  2. Capture Theory - the agency that should be regulating the industry is "captured" by it, instead, so regulation promotes industry profits rather than social welfare.
    • Does not explain regulation not supported by firms.
    • Performs better at explaining the timing of deregulation bank branching restrictions in the banking industry than NPT.
  3. Economic Theory of Regulation - interest groups control regulation. 
    • Stigler/Peltzman model: legislators balance desires of the interest groups and consumers to determine appropriate action.
      1. Regulatory legislation redistributes wealth.
      2. The behavior of legislators is driven by their desire to remain in office, so legislation is designed to maximize political support. 
      3. Interest groups compete by offering political support in exchange for favorable legislation.
    • Becker model: regulation is used to increase the welfare of more influential groups. Those who stand to gain the most and who suffer the least from free rider issues hold the most sway.

Tuesday, May 17, 2011

Torben Iverson. 2005. Capitalism, Democracy and Welfare

Torben Iverson. 2005. Capitalism, Democracy and Welfare. Cambridge University Press. Chapters 1 and 3.

Both workers and employers have interests in supporting the welfare state and providing workers with unemployment/social insurance and/or redistribution. Social protection solves market failures in the formation of skills. Workers have little incentive to invest in skills when they are at constant risk of losing their jobs and thus being unable to reap the benefits of their investment; employers have little incentive to invest in employee skills and training without institutions that prevent poaching and discourage unions from exploiting the potential holdup power that specific skills confer. Thus, social insurance encourages the acquisition of skills in the labor force, which in turn enhances the ability of some firms to compete in international markets.

Generally, portable skills do not require extensive nonmarket protection. The implication is that countries that focus on giving people general skills that are easily transferable should have less income redistribution because the cost of losing their jobs is relatively low (wage is based only on general skill and not special training and is therefore lower; also, the chances of finding a job after being laid off is high). Countries that focus on giving people firm or industry-specific skills complement increased costs to job loss with stronger social welfare programs. The result is that general skill systems are more likely to generate wage inequality and poverty traps because they limit opportunities and incentives for skill acquisition at the low end of the academic ability distribution.

Women should expect to experience greater wage inequality in firms/industries/countries that focus on specific skills rather than general skills. Positions that require specific skills are difficult to fill and, thus, cause firms to be more sensitive to interruptions. Women, saddled with the joy of carrying progeny around in their stomachs and family care, are at a greater risk of dropping out of the labor market than men. The result is that firms that require specialized training for its employees have less of an incentive to hire women. The weak position of women in the private labor market in specific skills countries is generally mitigated by public policies designed to give them greater employment opportunities and provide them goods such as daycare services. 

Monday, May 16, 2011

Laurence R. Helfer. 2009. Regime Shifting in the International Intellectual Property System

Laurence R. Helfer. 2009. “Regime Shifting in the International Intellectual Property System.” Perspectives on Politics 7(1): 39-44.

A multitude of international regimes with intersecting interests allowed states to forum shop. Forum shopping led to contradictory or inconsistent rules that gave countries an excuse to shirk in upholding agreements; it also allowed states to dictate the terms and norms under which interests were considered. They later, under the guise of harmonizing agreements, used those norms they established, rules endorsed by states, and legal experts in other international venues  to advocate for their policy preferences in forums they had chosen to avoid earlier.

Monday, May 9, 2011

Thomas Bernauer. 1995. The Effect of International Environmental Institutions: How We Might Learn More.

Thomas Bernauer. 1995. "The Effect of International Environmental Institutions: How We Might Learn More." International Organization 49(2): 351-77.
  • Current deficiencies in researching international environmental institutions:
    1. Dependent variables (institutional effect, effectiveness, efficiency, etc.) and explanatory variables (institutions and their features) are ill-defined and rarely married to a coherent theory.
    2. Analysts have focused on whether the existence or operation of institutions per se has an effect on actor behavior and other outcomes. Virtually no work has offered generalizable and empirically substantiated knowledge regarding which institutional design variables are critical to the success or failure of institutions under specific conditions.
  • The research strategy proposed:
    • The outcome to be explained when researching international environmental institutions is measured in terms of goal attainment. Goal attainment is defined as the difference, over time or across cases, between actor behavior or the state of the natural environment along dimensions identified by institutional goals, on the one hand, and certain endpoints defined by institutional goals, on the other. 
    • The effect of an institution is measured in terms of the extent to which existence or operation of the institution contributes, ceteris paribus, to variation in goal attainment. 
    • The effect of variation along specific dimensions of institutional design (such as decision-making rules, membership and access conditions, and the compliance system) is analyzed. 

Jeffrey T. Checkel. 2001. Why Comply? Social Learning and European Identity Change.

Jeffrey T. Checkel. 2001. “Why Comply? Social Learning and European Identity Change.” International Organization 55(3): 553–88.

Dependent variable: Compliance, the extent to which agents abide by and fulfill international rules and norms rather than socialization.

The author focuses on persuasion to operationalize the roles of communication and social interaction implicit but undertheorized in constructivist compliance studies. It also broadens the rationalist compliance approach that focuses on instrumental action and strategic exchange. In some cases, social actors comply by learning new interests through noninstrumental communication and persuasion.

For rationalists, state compliance stems from coercion (sometimes), instrumental calculation (always), and incentives--usually material, but possibly social as well. The choice mechanism is cost/benefit calculations, and the environment is one of strategic interaction in that it is premised on a unilateral calculation of verbal and nonverbal cues.

Many constructivists, especially those drawing from social movements scholarship, see the causal pathway to compliance in a similar way; that is, state compliance is a function of coercion (social sanctioning) and instrumental calculations (strategic social construction). However, a small group of constructivists, as well as cognitive regime theorists and students of the European Union, have suggested an alternative causal pathway, where state compliance results from social learning and deliberation that lead to preference change. In this view, the choice mechanism is non-instrumental, and the environment, to extend the earlier analogy, is one of social interaction between agents, were mutual learning and the discovery of new preferences replace unilateral calculation.

Case Studies
Checkel presents the cases of Germany and Ukraine as examples of norm socialization and persuasion, respectively. His cases suggest three different ways institutions influence the compliance process.
  1. Institutional legacies can frustrate the plans of national agents to comply, such as in Ukraine.
  2. The structure of domestic institutions seems key in explaining variance in the mechanisms through which compliance occurs. All else equal in German and Ukraine, the insulated nature of Ukrainian institutions increase the likelihood that compliance would be attained through persuasion and learning; likewise, pluralist German institutions made it more likely that social sanctioning would play a more important role in the compliance process.
  3. Preexisting norms were key in affecting agent willingness to comply with the injunctions of emerging European understandings. The presence of such cognitive priors hindered compliance (many elites in the German case), whereas their absence promoted it through persuasion and learning (the noviceness of so many agents in Ukraine).
It should be noted, however, that other explanations for the German and Ukrainian experience exist. Checkel does not debunk them.

Sunday, May 8, 2011

Allan Drazen. 2000. Political Economy in Macroeconomics

Allan Drazen. 2000. "The Time-Consistency Problem" and "Laws, Institutions, and Delegated Authority," in Alan Drazen, Political Economy in Macroeconomics (Princeton, NJ: Princeton University Press): 101-165. Chapters 4 and 5.

Chapter 4: This chapter just gives examples of time-inconsistency in policy choices that might arise. They all arise from heterogeneous preferences/conflicts of interests. 

  1. Time-inconsistency is said to arise if, though nothing has ostensibly changed, the policy chosen for time t+s chosen at time t is different from the policy chosen for time t+s at time t+s. 
I. Introduction
  • The puzzle: why does time-inconsistency arise if the fundamental characteristics of the policymaking environment does not appear to have changed?  
  • A conflict of interests of some sort is necessary for time inconsistency to arise.
  • Time inconsistent policy is interesting when it is chosen to maximized the welfare of those who are misled.
II. A Simple Model of Capital Taxation
  • There are two time periods. 
  • In the first period:
    • The government announces the tax rates it will implement in period two.
    • The individual being taxed has an exogenous endowment and chooses consumption level and capital accumulation to be used in the second period
  • In the second period:
    • The government implements a tax rate on the capital the individual saved in the first period and the labor the individual gives in the second period.
    • The individual gets the payoff from government spending and from consumption, which are functions of the capital saved from the first period and the labor the individual supplies in the second period.
  • Time-inconsistent solution: the tax policy the government announces for time period 2 while in period 1 is different from the tax policy the government actually implements at time period 2. Occurs whenever ex post capital elasticity is less than the ex ante elasticity.
    • In the first period, the government will announce a tax vector with a low rate to encourage capital accumulation.
    • In the second period, the government will carry out a tax that is different from the one announced in the first period and there is nothing people can do about it because they can't really change the capital supply anymore.
  • Precommitment solution: the tax policy the government would announce in the first period when it has a mechanism to commit to it and not reoptimize in the second period.
    • The precommitment solution is the same as the time-consistent solution that results when individuals take government preferences into account when they choose their income allocations and when governments take into account individual preferences into account when they choose their tax policies.
III. Explaining Time-Inconsistency in the Model of Capital Taxation
  • People cannot operate for their own good when they are subject to pre-existing constraints or distortions.
  • Sequential policymaking is a necessary but not a sufficient condition for the possibility of time consistency to arise. 
  • What is essential to the phenomenon of time inconsistency is conflict of interests in the second time period (ex post heterogeneity).
  • The dependence of utility on aggregate allocations induces a source of conflict among agents, which is crucial for the possibility of a time-inconsistency problem.
IV. A Basic Model of Monetary Policy
  • The policymaker chooses optimal inflation taking expected inflation as given. 
  • The conflict of interests which lie behind the possibility of time inconsistency:
    • Mirroring the capital tax problem, heterogeneity of interests in a representative agent model results in conflict of interests. Each individual wants to minimize the error of his own forecast of future inflation, but would like everyone else to under-predict inflation so that the economy-wide average prediction implies low unemployment.
    • Conflict not in the capital tax example: conflict of interests between policymakers with different objectives, reflecting perhaps a conflict of interests between the different constituencies they represent. Conflict occurs when the natural rate of unemployment that the fiscal authority finds optimal is not the same as the natural rate that the monetary authority finds optimal; the fiscal authority has an incentive to increase economic activity and thus drive up short-term inflation.
V. Equilibrium Solutions for All Models
  • Optimum is achieved when the policymaker is led at time t+s to carry out the policy announced at t, rather than some other policy, and it is "common knowledge" that he will indeed carry out the policy.
VI. Commitment vs. Flexibility
  • There might be gains to ensuring commitment, but in the real world, unforeseen and unforecastable events occur so that the optimal policy at time t+s cannot always be identified at time t. 
  • Escape clauses allow for commitment and flexibility.

Chapter 5: This chapter provides solutions to time-inconsistency problems. This chapter concentrates on how the policymaking environment can make policy credible, that is, how institutions or the creation of external circumstances (broadly defined) can lead to the expectation that announced policies will be carried out.

I. Introduction
  • When policymaking is viewed as a sequence of decisions, so that the government can reoptimize at every point, the problem of time consistency can be viewed as reflecting changes in incentives over time. Time t decisions lead to an evolution of state variables which give a policymaker the incentive to deviate at time t+s from his previously optimal policy.
    • Example: the decision to impose taxes on capital in a time-inconsistent way reflects the accumulation of capital, an accumulation that was induced by the government's previous policies. Hence, with the policymaker's narrowly defined objective function unchanged over time, time inconsistency may be thought of as due to change in the environment brought about by the policymaker himself.
  • Time inconsistency can be avoided if a policymaker at time t can choose policy in such a way that state variables at time t+s imply that it is optimal not to deviate at t+s from the previously optimal policy. 
  • One way to make current policy credible is by building a reputation by engendering the expectation that certain policies will be followed in the future on the basis of actions that have been observed in the past. 
II. Laws, Constitutions, and Social Contracts
  • There are important differences between promises which have no legal backing and laws (including widely accepted norms) in analyzing solutions to the time inconsistency problem.
    1. Laws have penalties attached to them so that there are explicit costs to breaking the law. Similarly, social norms have recognized costs associated with not following them.
    2. Explicit laws or widely recognized social norms make noncompliance more visible and hence more costly. 
  • Since laws make policies credible only to the extent that the penalties which enforce the laws are themselves credible, enhancing credibility depends on choosing the optimum structure of penalties to do this. 
  • Laws (and institutions more generally) can enhance credibility by raising the cost and lowering the benefit from deviating from a given policy. 
  • Effective commitment follows from the extreme difficulty in changing a law once it is given constitutional status.
  • Constitutions can make policy more credible because it does the following:
    • Restrict government's use of authority. 
    • Set out the basic processes of policymaking—laws about how collective choices should be made.
    • Treat issues that are more fundamental than others, such as basic rights of liberties.
    • Provide stringent amendment procedures than other laws.
  • Unwritten agreements that have force because they are generally agreed upon go by several names: social contracts, social conventions, social norms.
    • Social norm - a pattern of behavior that is customary, expected, and self-enforcing. 
III. Delegation of Authority
  • Delegation from a principal (the government) to an agent (the agency/authority) might occur for the following reasons:
    •  The agent may have greater expertise and experience regarding a policy area.
    • Governments are required to handle a large number of issues, each of which may be extremely complex, making it impossible for a single policymaker to make all decisions. The number and complexity of issues makes delegation essential.
  • The principal and agent can sign an incentive contract to eliminate agent bias in policy choices and ensure optimal outcomes. The contract institutionalizes the incentives for compliance; the cost of changing an institutional structure is higher than changing a policy in itself.
IV. Fiscal Structures for Time Consistency
  • A government can bequeath to its successor government a specific debt structure, such as setting maturing debt in each period equal to tax revenue net of government spending, to eliminate the incentive for its successor to change tax rates and thus try to reduce its debt obligations. 

Monday, May 2, 2011

Barbara Koremenos. 2001. Loosening the Ties that Bind: A Learning Model of Agreement Flexibility

Barbara Koremenos. 2001. "Loosening the Ties that Bind: A Learning Model of Agreement Flexibility." International Organization 55(2): 289-325.

Koremenos develops a model of the optimal duration and renegotiation provision of international agreements based on the idea that the distributional consequences of a new agreement may not be known with certainty at the time the parties first negotiate the agreement.

I. Introduction
  • Uncertainty in the international environment leads states to choose particular duration and renegotiation provisions. The provisions, in turn, affect whether or not states conclude international agreements and whether or not they renege on them.
  • Koremenos develops a model in which the parties to an agreement learn over time about its costs and benefits to them. This learning reduces their uncertainty about the agreement’s effects, with the result that they may eventually become sure enough of these effects to be willing to extend the agreement indefinitely.
  • Key factors identified by her theory that affect the choices of duration and renegotiation:
    1. The degree of agreement uncertainty - the variance of the distribution of gains from an agreement
      • The greater this uncertainty, the more likely states will want to limit the duration of the agreement and incorporate renegotiation.
    2. The degree of noise in the environment - the variance of confounding variables whose effect on outcomes may be confused with that of an agreement.
      • The greater the noise, the more difficult it is to learn how an agreement is working; incorporating limited duration and renegotiation provisions becomes less valuable in high noise level situations.
II. Model: Learning about the Workings of an Agreement
  • An agreement is an experience good in which knowledge of its effects is determined only by using it and observing outcomes.
  • Model assumptions:
    1. States care about the future—discount factor is not zero.
    2. States are risk averse.
    3. There is uncertainty about future states of the world.
    4. The costs of making agreements completely contingent are sufficiently large that the parties never choose to do so.
    5. There are costs to negotiating and renegotiating agreements
    6. There are costs to reneging on agreements.
    7. States have shared a priori beliefs about information they do not possess and revise their beliefs according to Bayesian logic as their interactions evolve.
III. Basics of the Model
  • There are two prospective parties to the agreement.
  • The division of the gain agreed upon in the initial agreement reflects the relative bargaining power of the two parties.
  • The basic problem facing the parties to an agreement in this model is to sort out the effects of the agreement from other random fluctuations in outcomes.
  • The states face a choice between an agreement of indefinite duration and one finite-duration agreement followed by an agreement of indefinite duration. In the simple two-period case, formally, the choice becomes one two-period agreement with no renegotiation or two one-period agreements with renegotiation in-between to realign the distribution of gains.
  • Renegotiation takes place whenever a finite duration agreement comes to an end and reflects information gained in the previous period, but not changes in bargaining power.
IV. Two-Period Game
  • Period 1: players engage in a Nash demand game in which they choose the expected division of gains; if they choose the same expected division of gains, they continue on to negotiations. Otherwise, no agreement.
  • Period 2: players enter agreement-type choice stage and choose among the following strategies:
    • No agreement
    • One two-period agreement (the analog of a nonrenegotiated agreement)
      • At the beginning of the of the second period, they have to choose whether to abide by the duration provision stipulated in the agreement.
        • If one party reneges on the agreement before the two periods are over, the parties negotiate a new agreement.
    • Two one-period agreements (the analog of a renegotiated agreement)
      • They must decide whether to proceed with the renegotiation in the second period.
  • An agreement is only achieved when the two players play the same strategies in round two. (Except for when they both play 'No agreement'. Obviously.)
  • Outcomes determined by nature and observed by players.
V. Hypotheses
  1. All else equal, for risk-averse parties an increase in agreement uncertainty increases the value of renegotiation and therefore makes the parties more likely to choose a renegotiated agreement / two one-period agreements over a nonrenegotiated agreement (one two-period agreement).
  2. All else equal, for risk-averse parties an increase in noise decreases the value of renegotiation and therefore makes the parties more likely to choose a nonrenegotiated agreement (a two-period agreement) over a renegotiated agreement (two one-period agreements).
VI. Expanded Model
  • The general model, built on the same concepts as the two-period model, expands the time horizons to infinity.
  • States now face new choices:
    1. An agreement-type choice between no agreement, one infinite-duration agreement, and one finite agreement followed by an infinite-duration agreement.
    2. If states choose to renegotiate the agreement, they must make a second choice regarding the timing of renegotiation.
VII. Empirical Data from Nuclear Non-Proliferation Treaty (NPT)
  • Main treaty provisions:
    • Article 1 - Prohibits nuclear-weapon states (NWS) from transferring nuclear explosives
    • Article 2 - Places obligations on the non-nuclear-weapon states (NNWS) not to receive or manufacture such weapons
    • Article 3 - Requires that signatories negotiate individually or collectively full-scope safeguards agreements with the International Atomic Energy Association (IAEA)
      Article 4 & 5 - Provides reassurance to NNWS that they will be able to enjoy peaceful uses of nuclear energy and explosions without discrimination; the NWS are obliged to provide both technological and material assistance to NNWS
    • Article 6 - Demands progress by existing nuclear powers on controlling the arms race
  • Uncertainty about:
    • Participants led to uncertainty about the distribution and level of security benefits under NPT
    • Security consequences
    • Effect of NPT on economic prosperity and technological development
    • Political costs and benefits that would result from the agreement.
  • Evidence of resolving uncertainty through learning:
    • The parties to the NPT planned review conferences every few years at which they could cooperatively take stock of how the treaty was working in practice. 
    • In terms of the distribution of political gains and losses, it became clear over time that concerns that the NPT would prevent European integration were groundless. Uncertainty with regards to other concerns were eliminated reduced over time as well.
VIII. Conclusion
  • The credibility of commitments in the face of uncertainty—in this paper, a one-shot uncertainty surrounding the division of gains from an agreement—requires a trade-off between flexibility and constraint. 
  • This model shows that the reason we do not observe much reneging in actual agreements is in part because their duration and renegotiation provisions have been chosen in ways that act to minimize this costly behavior.

Sunday, May 1, 2011

James McCall Smith. 2000. The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts

James McCall Smith. 2000. "The Politics of Dispute Settlement Design: Explaining Legalism in Regional Trade Pacts." International Organization 54(1): 137-80.

This paper investigates the conditions under which member states adopt legalistic mechanisms for resolving disputes and enforcing compliance in regional trade accords. To account for variable levels of legalism, he offers a theory of trade dispute settlement design based on the domestic political trade-off between treaty compliance and policy discretion.

I. Introduction
  • Parallel trends in international trade:
    1. Rise of regionalism and new integration initiatives drawn along geographical lines
    2. Move toward legalism in the enforcement of trade agreements; trading states have given impartial third parties the authority to review and issue binding rulings on alleged treaty violations, at times based on complaints led by non-state or supranational actors.
II. Defining the Spectrum: From Diplomacy to Legalism
  • Level of legalism depends on (see Table 1 on page 143):
    1. Third-party Review - an explicit right to third-party review of complaints regarding treaty application and interpretation is more legalistic (as opposed to diplomatic). 
    2. Third party Ruling - (secondary concern if there is an automatic right to third-party review) - if judicial rulings are formally binding in international legal terms, then it is more legalistic.
    3. Judges - how legalistic each treaty is depends on the the number, term, and method of selecting arbitrators or judges. 
      • Standing tribunals are likely to be more consistent over time with their rulings—and thus more legalistic—ad hoc panels whose membership and rulings changes with each dispute.
    4. Standing - whether actors have standing to file complaints and obtain rulings is the measure of legalism. 
      • In general, the more expansive the definition of standing, the more legalistic the dispute settlement mechanism. 
    5. Remedies in cases of treaty violation. 
      • The most legalistic remedy is to give direct effect in domestic law to dispute settlement rulings made at the international level. Where rulings are directly applicable, government agencies and courts have a binding obligation under national law to abide by and enforce their terms.
      • Where treaties have no direct domestic effect, another remedy is the authorization of retaliatory trade sanctions by the complaining state. 
III. The Model Scope
  • Model assumptions:
    1. The model takes as unproblematic the motivation and capacity of domestic political leaders to negotiate a trade pact.
    2. The substantive terms of a trade agreement are exogenous; the model focuses only on the procedures chosen by parties to enforcement commitments.
    3. There is only one bargaining forum.
    4. Regime type does not affect preferences.
    5. Trade policy changes over time are external to the strategic interaction of disputants and independent third parties.
IV. The Actors and their Motivations
  • Actors: political leaders
  • Why the actors might be wary of legalistic trade dispute settlement: the threat that legalistic trade dispute settlement poses to policy discretion of political leaders is threefold. 
    1. It may constraint their ability to manage the unforeseen costs of adjustment, making it more costly to provide relief or protection to specific groups injured by trade liberalization.
    2. It may limit their general policy autonomy across a range of domestic regulations, which it judges against treaty commitments to eliminate nontariff barriers to trade.
    3. The delegation of authority to third parties may constraint their ability to pursue trade policy bilaterally, a strategy with distinct political advantages. 
  • Why the actors might want legalistic trade dispute settlement: legalistic dispute settlement improves the value of trade agreements through two principal channels:
    1. By defining, monitoring, and enforcing compliance, it constraints the opportunistic behavior of foreign governments that are tempted to provide protection to their constituents. 
    2. As an institutional commitment to policy stability, it promotes the confidence of the private sector, inducing traders and investors to take risks that increase the aggregate benefits of liberalization. These activities improve the rates of unemployment, inflation, and growth.
V. How Governments Specify Determine Dispute Settlement Preferences Ex Ante 
  • How political leaders assess the trade-off between policy discretion and treaty compliance happens in two stages:
    1. National preference formation
    2. International bargaining
  • The level of legalism preferred by a particular government in a specific trade negotiation depends on:
    1. Intrapact trade-dependency - the extent to which its economy depends on trade with other signatories in the accord. The more trade-dependent the economy , the more legalistic the dispute settlement mechanism its government will tend to favor. Legalistic dispute settlement is more valuable politically where trade with prospective partner countries accounts for a larger share of the domestic economy. 
    2. Relative economic power. The more powerful the country in relative terms, the less legalistic the dispute settlement mechanisms the government will favor. 
    3. The proposed depth of liberalization. The more ambitious the level of proposed integration, the more willing political leaders should be to endorse legalistic dispute settlement because deeper integration promises to generate larger economic gains.
V. Hypotheses
  • Observations suggest that the relative value of liberalization--and, by implication, of legalistic dispute settlement--is usually lower to larger economies than to smaller economies. So the signatory state with the largest economy is most likely to wield the unit veto that determines the level of legalism in a given agreement.
  • Legalistic dispute settlement is expected only in accords among parties whose relative size and bargaining leverage are more symmetrical; when there is a hegemon, it can impose its preferences can more effectively use unilateral trade measures. 
  • In settings of low economic asymmetry--provided the proposed legislation is sufficiently deep--all member governments have an incentive to improve treaty compliance through impartial third parties. 
VI. Results from Empirical Data
  • Levels of economic asymmetry and legalism are inversely related given the preferences and negotiating leverage of regional hegemons. Highly legalistic forms of dispute settlement generally do not occur in highly asymmetric settings. 
  • When asymmetry is low, high levels of legalism occur only where the proposed level of integration is high. 
  • Evidence generally confirms a positive relationship between the level of proposed integration and legalism.
  • Anomalous combinations of high integration and low legalism in trade agreements share high asymmetry.
  • The most robust predictor of dispute settlement design is the interaction of asymmetry and proposed integration. If the level of proposed integration is relatively low, there is less legalism in the appointment of judges. 
VII. Conclusion
  • This approach is grounded in a political calculation of costs and benefits in the domestic arena, not in expectations about absolute or relative gains internationally. 
  • Given a regional trade initiative, negotiations over dispute settlement design are driven by domestic political concerns.