A Theory of Economic Sanctions

Abstract

This paper explores a formal coercion mechanism where a sender threatens a third party to join a sanction campaign against a target. We demonstrate that though such sanctions are designed to result in more third-party cooperation, they inevitably suffer from commitment problems as do the dyadic ones. We provide a subgame perfect Nash equilibrium path in repeated interaction setting that leads to a higher level of compliance by the target and show that the equilibrium level of punishment threat from the sender to a third party not only depends on the trade dependency relationship between the two but also on their relationships with the target. If the target’s dependency on the sender decreases, the maximum level of punishment that the sender is willing to impose on the third party increases. If the third party’s dependency on the target increases, the minimum level of punishment required to make the third party comply increases. If the latter is greater than the former, even though a patient sender can commit to punish the non-cooperating third party, the level of punishment will not have a deterring effect and will fail to bring out compliance by the target. We analyze the US sanctions against Iran using this framework.