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john, Robert Keohane, David Laitin, Ian Lustick, mon than by its allies. This generalsituation,the
JamesMorrow, Michael Munger,KennethShepsle; "chain storeparadox," was firstanalyzed by Selten
fromthe internationalrelationsworkshops at the (1975, 1978).
Universityof Illinois and the Hoover Institution, 8. The beta distributionis a flexibledistribu-
Stanford;and fromthepoliticaleconomyworkshop tionalformon theunitinterval.It describesthelimit
at WashingtonUniversity.We are gratefulfor the of infiniterepeatedsamplingfroma Bernoulli(zero
supportof the National Science Foundationunder or one) population. When samplingfrom such a
GrantSES85-12037. populationwithprobabilityw of obtaininga "one,"
1. Whether applied to international trade, the beta distributionhas parameters(x and ,3 such
finance,or defense,the"theoryof hegemonicstabil- that its mean, E(W) is equal to ca/(a + p3).The
ity" holds thatregimessurviveonly if backed by a variance of W is aci/l(ca + 3)2(ci+ 3 + 1)]. The
hegemonicpower. values of ca and is may be any positive numbers
2. By assumingthe initial asymmetryof hege- (DeGroot 1970, 35). To grasp the roles of ca and A,
mon and ally and explicitlymodelingthe strategic considerBayes' ruleforupdatinga beta prior.If the
problemof thehegemonin achievingand maintain- initialparametersare (a,,() and a "one" is observed,
ing a reputationforwillingnessto engage in costly a becomes a + 1, increasingthemean; ifa "zero" is
retaliation,thepresentstudygoes beyond theexist- observed,,3becomes,3 + 1, decreasingthemean. In
ing internationalrelations literatureon "threat a loose sense,then,a givesthenumberof "1's" and fi
power"(Bramsand Hessel 1984), "capability"(Maoz the numberof "0's" in previousobservations.
1983) and "resolve" (Allan 1983; Cioffi-Revilla 9. An ally in case 2 who began withan estimate
1983). of w just below the upper thresholdwould assume
3. For instance,SteinremarksthatKindleberger, that acquiescence indicateda high cost of punish-
Gilpin, and Krasner "all mentionthat a hegemon ment.It would therefore add one to ca,givinga new
uses inducementsand force.... The hegemonmust estimateof w = 03/(c+ ,3 + 1), whichis by defini-
get othersto agree. . . . Withoutagreementsthere tionof thiscase less thanb, so it would now be pre-
can be no regime.Such accords typicallyrequirethe pared to challenge.
hegemon to make importantconcessions" (1984, 10. Althoughours is not the unique equilibrium
356-59). in thisgame,all but one of theothersalso requirethe
4. An influentialearly example is Schelling use of mixedstrategies.See theAppendix.
(1960, esp. 24-27, 119-50), and regime stability 11. Their model, too, requiresthe use of mixed
theorists have often taken the same approach strategiesin equilibrium.There, also, the oppor-
(Downs, Rocke, and Siverson1985; Jervis1985, 61, tunitiesforreputationbuildingvarywiththegame's
69, 73-78; Snidal 1985a, 600; Snidal 1985c, 931). parameters;and theresultshold withany combina-
5. Our modelis a generalizationof thatofKreps tionof severalallies, each makingseveraldecisions.
and Wilson (1982a) for the special case of a two- 12. For instanceassume initialvalues of two for
period game, as explained below. Every game of each of ca and j3, so that E(W) = .5 initially(the
incompleteor asymmetricinformationessentially cutoffbetweencases 2 and 3) and the boundaryof
involves problemsof reputation.Some of the eco- case 4 = .6 (see Figure2). Assumean ally'spayoffof
nomic theory literatureclosest to our concerns .58, puttingthisally squarelyin case 3. Then, after
includes: Fudenbergand Kreps 1985 on reputation several observations of punishmentand acqui-
buildingby a monopolistfacinga varietyof poten- escence,both a and j3could have increasedby two,
tial competitors;Rubenstein1985 and Grossman leavingE(W) unchangedat .5, butreducing(a + 1)/
and Perry 1986 on bargainingunder asymmetric (a + , + 1) to .55, placingtheally in case 4 (always
information;Sobel 1985 on the establishmentof challenge).
credibilityin ongoingsignalinggames; and Fuden- 13. For example,thehegemonmay lose itsasym-
bergand Tirole1986 on a "war of attrition"in which metricalabilityto punish,as describedforexample
two duopolists attemptto convince each other to by Keohane (1984, chap. 9). Or thecollectivegood
exit from an industrythat cannot support them producedand distributed by theregimemay lose its
both. value. Allies can observethesechangesand become
6. We treattheseallies as two different
players, aware thatrandomshocksare now morelikelythan
although in fact our model does not distinguish beforeto put an end to theregime.
betweentwo allies, each makingone decision,and a 14. This is an aggressivestrategy,but theirpre-
single ally making two decisions sequentially.See vious exploitationwithinOPEC shows thatalterna-
Calvert1987. tive "nicer"side-paymentstrategieswould not suc-
7. Formally,each xt has the Bernoullidistribu- ceed in inducingcooperation,nor would any alter-
tionwithp = w. In thisway we relax the assump- native (for instance,military)capacities allow the
tion of Kreps and Wilson (1982a) and othersthat Saudis the same leadershippossibilities.
hegemonic sanctions are either always costly or 15. Saudi Arabia consumes1 mbd of itsown oil.
always costless. In contrast,our model allows this Assumeit costs$2 perbarrelto produce.Theirearn-
cost to vary in a way betterunderstoodby thehege- ings = (production - domesticconsumption) X
464
(sale price - productioncost). Then in thisscenario 23. The authorsare gratefulto David Baron for
theSaudis will earn 5 (= 6-1) X $13 (= 15- 2), clarifyingthisissue.
or $65 millionper day.
16. UndercompetitionwithreputationtheSaudis
make $75 million a day (5 X $15). Under quotas
withreputationtheycould make $69 million-(4 -
1) X ($25 - 2), or 3 X 23. Again, sincelowerpro- References
duction lasts longer,we can treatthe Saudis as in-
different between the presentvalues of these two Ahrari, Mohammed E. 1986. OPEC: The Falling
alternatives. Giant. Lexington:UniversityPress of Kentucky.
17. For instance,virtuallyall U.S. oil companies Allan, Pierre.1983. CrisisBargainingand theArms
reducedcapital spendingforexplorationdrastically Race: A TheoreticalModel. Cambridge, MA:
in 1986. Moreover,many decisionsare irreversible. Ballinger.
Forexample,thereopenpriceofmanystripperwells Axelrod, Robert. 1984. The Evolutionof Coopera-
thatwere profitableat $30 per barrelis at least $50 tion. New York: Basic Books.
per barrel. Indeed, Sheik Yamani himselftook the Barro, Robert J. 1986. Reputationin a Model of
trouble to stress this point (New York Times, 25 MonetaryPolicy with IncompleteInformation.
March 1986). Journalof MonetaryEconomics17:3-20.
18. A complicationis that the Saudis have only Brams, Steven, and Marek Hessel. 1984. Threat
one instrumentof punishing,driving down the Power in Sequential Games. International
world price of oil, so theycannot targetretaliation Studies Quarterly28:23-44.
against individual opponents. In our model, the Calvert, Randall L. 1987. Reputationand Legisla-
punishmentof an ally harmedonly thatally. Also, tive Leadership.Public Choice 55:81-119.
some of the Saudis' usual "friends"also suffercon- Cioffi-Revilla,Claudio. 1983. A ProbabilityModel
siderablyfromlow oil pricesand may threatenvio- of Credibility.Journalof ConflictResolution27:
lence againstthe Saudis. Moreover,at pricesbelow 73-108.
approximately$15 a barrel,oil competesfavorably DeGroot, Morris. 1970. Optimal StatisticalDeci-
withEuropeancoal and U.S. naturalgas industries, sions. New York: McGraw-Hill.
multiplyingthe number of "enemies" the Saudis Downs, George W., David M. Rocke, and Ran-
face. dolph M. Siverson.1985. ArmsRaces and Coop-
19. Moreover, their oil royaltiesare only col- eration. WorldPolitics38:118-46.
lected on productionabove a fair recoveryprice, Fudenberg, Drew, and David M. Kreps. 1985.
probablyin thelow twentiesformostNorthSea oil, Reputationand Multiple Opponents. Graduate
so significantrevenueswere unlikelyto reaccrueat School of Business Research Paper No. 843.
any oil price likelyin the near term. Stanford,CA: StanfordUniversity.
20. We are gratefulto Jim Morrow (personal Fudenberg,Drew, and JeanTirole. 1986. A Theory
communication)forthesesuggestions,as well as the of Exit in Duopoly. Econometrica54:943-60.
exampleof Warsaw Pact relationsforthepossibility Gilpin, Robert. 1981. War and Change in World
of decliningseverityover time. Politics. Cambridge: Cambridge University
21. For instance,it was a year afterthe budget Press.
deferralbeforefiguresbecame public. Moreover, it Grossman, Sanford J., and Motty Perry. 1986.
was hard to tellhow much oil theSaudis were pro- Sequential BargainingunderAsymmetricInfor-
ducing. On one day in earlyMarch 1986, the Wall mation.Journalof Economic Theory39:120-54.
Street Journal and New York Times contained Harsanyi, J. C. 1967-68. Games with Incomplete
claims (respectively)that Saudi production had Information Played by "Bayesian"Players.3 pts.
declinedand increased.Innovationsin netbackcon- ManagementScience 14(Series A):159-82, 320-
'tracting(which provide for paymentto crude oil 34, 486-502.
producersat ratesdependenton theultimatemarket Harsanyi, J. C. 1973. Games with RandomlyDis-
prices of refinedproducts) meant that the Saudis turbed Payoffs: A New Rationale for Mixed-
(who observe theirown portfolioand cash flow) StrategyEquilibriumPoints. InternationalJour-
knew farbetterthananyone else at what pricetheir nal of Game Theory2:1-24.
oil was being sold. Jervis,Robert. 1985. From Balance to Concert: A
22. For example,in February1985 theNew Zea- Study of InternationalSecurity Cooperation.
land governmentrefused a U.S. request for a WorldPolitics38:58-79.
destroyerBuchanan to pay one of its ports a call. Keohane, Robert. 1980. The Theory of Hegemonic
The U.S. retaliatedby declaringthe ANZUS treaty Stabilityand Changes in InternationalEconomic
no longerbindingso as not to set a precedentthat Regimes,1967-1977. In Change in the Interna-
could be followedby "allies that really count, the tional System,ed. Ole R. Holsti, Randolph M.
ones in NATO and, of course,Japan"(Washington Siverson, and Alexander L. George. Boulder,
Post, 26 February1985). CO: Westview.
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