Peace Economics, Peace Science and Public Policy

An Article Submitted to

Peace Economics, Peace Science and Public Policy Manuscript 1210

Aspects of Peace Economics Raymond Dacey∗

∗ †

Lisa J. Carlson†

University of Idaho, [email protected] University of Idaho, [email protected]

c Copyright 2010 Berkeley Electronic Press. All rights reserved.

Aspects of Peace Economics Raymond Dacey and Lisa J. Carlson

Abstract The Economics of Peace can be modeled as a basic multi-game system composed of economic games played between and among firms and consumers in each of two nations, domestic pressure games played by firms, consumers, and the government within each nation, and political games played between the governments of the two nations. The integrated study of the basic system is given in the account of two-level games (Putnam, 1988). The details of these games were sketched in Dacey (1994, 1996-a) and are updated here via the results obtained in the assassin models presented in Carlson and Dacey (2009, forthcoming). While the field has made numerous advances in the last sixteen years, the conclusion of Dacey (1994) still holds — Peace Economics, as initially characterized by Isard (1994) and Polachek (1994), consists in the resolution of conflicts arising in the multi-game system. Since the games are played rationally, the tools of Peace Economics are the tools of the general theory of rational choice. KEYWORDS: peace economics, rational choice, two-level games, assassin models

Dacey and Carlson: Aspects of Peace Economics

Introduction The issue of characterizing Peace Economics was initiated sixteen years ago by Walter Isard and Solomon Polachek as editors of this journal. It is with great pleasure that we revisit this important issue. But we do so with great sadness at the recent death of Walter Isard. The characterization of Peace Economics began with two essays by Isard (1994) and Polachek (1994), followed, in order, with essays by Tinbergen (1994), Dacey (1994), Arrow (1995), and Fischer (1995). Dacey (1994) attempted to provide a basic model that could incorporate both the broad perspective advanced by Isard and the trade perspective advanced by Polachek. Dacey (1994) was extended in Dacey (1996-a and 1996-b). Walter Isard later asked us to solve the variation of the traditional deterrence game wherein the primary decision maker faces a domestic adversary along with the usual international adversary. Carlson and Dacey (2009) presents the solution for the case of one domestic adversary in a game played under one-sided incomplete information, and Carlson and Dacey (forthcoming) presents the solution for the case of two domestic adversaries in a game played under two-sided incomplete information. The present paper updates the earlier peace economics papers via the results obtained in Carlson and Dacey (2009, forthcoming). Basic Structure Isard begins his 1994 paper as follows: [Peace economics] is generally concerned with: (1) resolution, management or reduction of conflict in the economic sphere, or among behaving units in their economic activity; (2) the use of economic measures and policy to cope with and control conflicts whether economic or not; and (3) the impact of conflict on the economic behavior and welfare of firms, consumers, organizations, government, and society. (Isard, 1994, p. 9) Polachek begins his 1994 paper with: “Conflict is trade gone awry” (Polachek, 1994, p. 12). The Economics of Peace, so characterized, can be modeled as a basic multi-game system composed of economic games played between and among firms and consumers in each of two nations, domestic pressure games played by firms, consumers, and the government within each nation, and political games played between the governments of the two nations. The details of these games were sketched in Dacey (1994, 1996-a) and were treated in greater detail in Dacey (1996-b). The basic two-nation structure is as follows:

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Submission to Peace Economics, Peace Science and Public Policy

This system typically is studied in parts and each part has its own discipline(s). The horizontal games between governments are treated in International Politics and the horizontal games between firms and consumers are treated in International Economics. The vertical games between firms and consumers, on the one hand, and governments, on the other, are treated in Economics and various sub-disciplines in Political Science, including American Politics, Public Administration, and Comparative Politics. Each of these disciplines has a rich literature, but each literature studies its respective issues in isolation. Nowhere is the system studied as a whole. The analysis most immediately relevant to the integrated study of the basic system is given in the account of two-level games (Putnam, 1988). The basic twolevel game involves the governments in the two nations and the domestic entities (here, firms and consumers) in one of the nations. For example, the two-level game played by the government of nation A is as follows:

http://www.bepress.com/peps

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Dacey and Carlson: Aspects of Peace Economics Nation A Government

Nation B International Political game

Government

Domestic Pressure game

Firms and Consumers

The complete four player system can be seen as two, two-level games played by governments and two, two-level games played by the firms and consumers. Putnam (1988, p. 434) claims “the politics of many international negotiations can be usefully conceived as a two-level game.” Putnam elaborates as follows: The political complexities for the players in this two-level game are staggering. Any key player at the international table who is dissatisfied with the outcome may upset the game board, and conversely, any leader who fails to satisfy his fellow players at the domestic table risks being evicted from his seat. (1988, p. 434) Putnam makes two key points here. First, the complexity of the system is the reason analysts do not study the system as a whole. Second, negotiation games are by themselves complex for a government. A government must negotiate at the national level with domestic pressure groups and negotiate at the international level with another government. The complexities involved in this two-level game go beyond standard accounts of negotiation (e.g., Raiffa, 1982; Rubenstein, 1982; Schelling, 1960) and nonstandard, i.e., behavioral, accounts of negotiation (e.g., Bazerman and Moore, 2009, especially chapters 9 and 10; Butler, 2007). A government has “powerful incentives for consistency between the games” Putnam (1988, p. 434); however, Tsebelis (1988) finds that it is not unusual for an act to be optimal in one game (e.g., the domestic game), but to be sub-optimal in the other game (e.g., the international game). 3


To complicate matters even further, the government in a two-level game can be “removed” by either the international adversary or the domestic players. On one view, if leaders are primarily motivated by the desire to remain in power, then decisions in the various games are based on choosing the act that results in political survival (Bueno de Mesquita, et al., 2003). In sum, the government faces the decision problem involved in balancing both the domestic and international aspects of the two-level game. Introductory analyses of the domestic adversary decision problem treated here are developed via the assassin models presented in Carlson and Dacey (2009, forthcoming). The Assassin Models The assassin models begin with the traditional deterrence game (Zagare and Kilgour, 1993; Morrow, 1994) played by two players named Challenger and Defender. Challenger moves first and can choose Threaten or Not Threaten. If Challenger chooses Not Threaten, then the game terminates and the outcome is the status quo (SQ). If Challenger chooses Threaten, then Defender can choose either Resist or Give In. If Defender chooses Give In, then the game terminates in Defender’s acquiescence (ACQ). If Defender chooses Resist, then Challenger can choose either Escalate or Back Down. If Challenger chooses Escalate, then the game terminates in conflict (WAR); if Challenger chooses Back Down, then the game terminates in Challenger’s capitulation (CAP). The traditional deterrence game posits that Challenger and Defender each can be one of two types, soft or hard, specified by their preference orderings, as follows: soft Challenger ACQ SQ CAP WAR hard Challenger ACQ SQ WAR CAP

soft Defender CAP SQ ACQ WAR hard Defender CAP SQ WAR ACQ

In Carlson and Dacey (2009), we extend the Traditional Deterrence Game by adding a third player named Assassin. We presume that Assassin is an actor who is part of Challenger’s own domestic constituency and who reacts to Challenger’s choice of Back Down. If Challenger chooses Back Down, then Assassin’s reaction involves a choice between Attack and Not Attack. This behavior has been observed in reality and is captured in the data (Öberg, Möller, and Wallensteen, 2009). The term ‘Assassin’ is employed for convenience and refers to one among many different domestic individuals or groups, including voters in a democratic


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system, economic interest groups, terrorists, and of course, literal assassins. The term ‘Attack’ is employed to denote that an assassin can inflict domestic punishment on a leader, typically the removal from power via elections, a military coup, etc. The introduction of Assassin involves the introduction of a new payoff, CAP*, which is realized if Assassin chooses Attack. The model assumes that Challenger finds CAP* inferior to CAP, and that that Defender is indifferent between CAP and CAP*. The model also assumes that Challenger is uncertain about Defender’s type, and therefore the model involves a game of one-sided incomplete information. In Carlson and Dacey (forthcoming), we extend the Traditional Deterrence Game and the foregoing single assassin model by including players named Assassin #1 and Assassin #2. Assassin #1, like Assassin, is an actor who is part of Challenger’s own domestic constituency and who reacts to Challenger’s choice of Back Down. If Challenger chooses Back Down, then Assassin #1’s reaction involves a choice between Attack and Not Attack. Similarly, Assassin #2 is an actor who is part of Defender’s own domestic constituency and who reacts to Defender’s choice of Give In. If Defender chooses Give In, then Assassin #2’s reaction involves a choice between Attack and Not Attack. The introduction of Assassin #2 involves the introduction of a new payoff, ACQ*, which is realized if Assassin #2 chooses Attack. The model assumes that Defender finds ACQ* inferior to ACQ and that Challenger is indifferent between ACQ and ACQ*. The model assumes that each player is uncertain about the other player’s type, and therefore, the model involves a game of two-sided incomplete information. The findings of the assassin models are related to Putnam’s analysis of two level games, and, in particular, to Schelling’s observation that “the power of a negotiator often rests on a manifest inability to make concessions and meet demands …” (Schelling 1960, p. 62; quoted in Putnam, 1988, p. 440). Specifically, we highlight two findings derived from our analyses in the single and double assassin models. One question that was addressed was if, or when, domestic constraints can be an advantage or disadvantage in the international game (Schelling, 1960; Putnam, 1988; Milner, 1997). We find in the single assassin model that a highly constrained player, i.e., a Challenger holding a high probability of being assassinated, who chooses Threaten, is guaranteed a better payoff than if the same player were less constrained, i.e., a Challenger with a low probability of being assassinated who chooses Threaten. This result depends on playing against a soft Defender.

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However, this particular result from the single assassin model cannot be generalized to the double assassin model. Indeed, moving from a game of onesided incomplete information to a game of two-sided incomplete information alters the result. If both players have incomplete information, then having a high domestic constraint does not automatically produce a bargaining advantage that translates into a better payoff. Put simply, whether being highly constrained works in a player’s favor or not is very sensitive to the information conditions and the level of constraint the modeler imposes on each player (Tarar, 2001; Gent, 2009). The second key and striking finding that holds in both the single and double assassin models is that the probability of being assassinated affects a player’s propensity to choose Threaten and, thereby, the propensity to choose to initiate international conflict. Players who hold a low probability of being assassinated are more prone to initiate an international conflict in the first place than are players who hold a high probability of being assassinated. The players who are more prone to initiate an international conflict eventually back down and thereby activate their possible elimination by Assassin. The players who are less prone to initiate an international conflict eventually escalate, and thereby always avoid Assassin. It is also important to note that identifying the probability of assassination as either low or high does not necessarily mean that the probability is absolutely low or high. The value of the probability is determined by a player’s payoffs. Thus, a low (respectively, high) probability of being assassinated could, depending on the payoffs, have a value of .75 (respectively, .35). Taken together, these findings are examples of the staggering array of political complexities noted by Putnam. Peace Economics While the field has made numerous advances in the last sixteen years, the conclusion of Dacey (1994) still holds – Peace Economics, as initially characterized by Isard (1994) and Polachek (1994), consists in the resolution of conflicts arising in the four-player system presented at the outset of this paper. Since the games are played rationally, the tools of Peace Economics are the tools of the general theory of rational choice. Therefore, while rational choice theory is applicable, and the theory of two-level games is very helpful, both must be expanded to provide an account of simultaneous and sequential play in interconnected two-level games. Herein remains a great challenge and opportunity for researchers in Peace Economics. We still require well-developed theories for systems composed of multiple two-level games.


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