Credible Commitment Problem Research Articles

Each Man For Himself? Rival Theories of Alliance Economics in The Early State System

When military alliances are expensive, they naturally raise distributional issues. This article considers two theories to explain how much a state will voluntarily contribute to the economic burdens of defense. Empirical work has relied largely on data from the twentieth century. This article provides an out-of-sample test to evaluate the models. Using data on the Quintuple Alliance, the results are more consistent with the predictions of the joint products model than the pure public goods model. Due to credible commitment problems, and intra-alliance cleavages, I argue that we should not expect substantial free riding in most conventional military alliances.

Credible commitment and congestion pricing

Transportation analysts frequently assert that congestion pricing’s political obstacles can be overcome through astute use of the toll revenue pricing generates. Such “revenue recycling,” however, implies that the collectors of the toll revenue will not be its final recipients, meaning that any revenue recipient must believe that the revenue collector will honor promises to deliver the money. This raises the potential for credible commitment problems. Promises to spend revenue can solve one political problem, because revenue is an easy benefit to understand, but create another one, because revenue is easy to divert. Revenue recycling may therefore not be a promising way to build political support for congestion pricing. We highlight the role commitment problems have played efforts to implement congestion pricing, using examples from around the world and then focusing on California. Because congestion reduction is a more certain benefit than any particular use of the toll revenue, demonstration projects, rather than revenue promises, will be key to pricing’s political success.

Power-sharing and democracy promotion in post-civil war peace-building

Why do peace and democracy not often go together in countries emerging from violent civil conflicts? If the promotion of peace and democracy are conflicting objectives, what are the sources of the problem? Based on the conceptual distinction between short-term peace-making and long-term peace-building that incorporates democracy promotion as an essential component, this article argues that peace-making and democracy promotion often constitute a conflictual relationship when external actors impose a particular set of institutional arrangements – namely, power-sharing agreements – in order to end civil war as quickly as possible. The sharing of power between governments and rebels can be effective at reducing the security dilemma and credible commitment problems in the transition from civil war to peace, but it is a short-term solution and a source of the conflict between peace-making and democracy promotion. This is because power-sharing builds wartime divisions into post-war political structures and provides a strong incentive for former warring parties to garner political support primarily from their own constituent groups. The persistence of wartime cleavages tends to lower public confidence in newly established governmental institutions. Thus, power-sharing is likely to function as an institutional barrier to the establishment of democracy in the long run. This article demonstrates the adverse effects of power-sharing on democracy promotion by analysing post-civil war electoral politics and public attitudes toward former warring parties and governmental institutions in Bosnia and Herzegovina.

Pricing online subscription services under competition

In recent times, rapid advances in the field of information technology have enabled firms selling information products (for example, in the form of a CD) to provide subscription services using remote servers. Making the product versus service decision involves a trade-off. Online subscription offerings are perceived to be of lower quality because of data security and network reliability issues but can reduce or even eliminate the credible commitment (of prices) problem typically faced by firms selling durable products. We model an infinite horizon game between two symmetric firms that choose the design architecture, that is, product or service (and consequent contracting scheme: selling or subscription) and then set prices to optimize profits. The perceived quality loss enables firms to differentiate based on design architecture/contracting scheme and make positive profits. Further, the firm that sells a product makes higher profit than the firm that offers a subscription service. However, as the discount factor increases, the presence of a seller leads to a credible commitment problem for both firms leading to a reduction in prices. The results offer an explanation for the persistence of firms selling products rather than services. Further, a firm offering a subscription service may be subject to price pressure due to the price commitment issues of a competing seller. We also extend our insights to other settings: one involving asymmetric firms and the other involving different discount rates for product quality and producer/consumer surplus.

Two Sword Lengths: Losers' Consent and Violence in National Legislatures

Multi-party elected national legislatures should be venues for peacefully resolving conflicts be- tween opposing groups. However, they can become scenes of physical violence. Such violence is an indication that a country's legislative institutions are functioning far from perfectly as legislative actors are deciding to disregard the rules of the ‘game'. In some cases, such as recently in Ukraine, violence can indicate and possibly fuel deeper political divisions. In this first global study of legislative violence, I argue that brawls are more likely when legislators find it difficult to credibly commit to follow peaceful bargaining outcomes. The problem is exacerbated when legislatures are ‘unfair'. Un-fairness is higher and credible commitment problems more acute in countries with disproportion- ate electoral outcomes and new democracies. I find robust evidence for this argument using a case study of legislative violence in the antebellum United States Senate and a new global data set.

Credible commitment in carbon policy

In this article the problem of credible commitment in carbon policy is discussed. Investors favour long-term predictability of the policy, but without any external enforcement mechanisms a commitment made by a government can be withdrawn, leading to scepticism and lack of credibility. This results in increased market risks and investment hold-up. Regulatory uncertainty stems from (i) strategic interactions between government and firms, (ii) potential learning about climate damage and abatement cost and (iii) political volatility. Although commitment to future policy encourages private investment, it also imposes costs in the form of reduced flexibility to accommodate new information or preferences. The article reviews devices that may help policy makers raise the level of commitment while also leaving some room for flexible adjustments. In particular, legislation of a long-term governance framework, delegation to an independent carbon agency and securitization of investors' stakes in emission markets offer palliative approaches.

The Middle East and North Africa’s Resilient Monarchs

This paper helps explain the variation in political turmoil observed in the MENA during the Arab Spring. The region's monarchies have been largely spared of violence while the republics have not. A theory about how a monarchy's political culture solves a ruler's credible commitment problem explains why this has been the case. Using a panel dataset of the MENA countries (1950-2006), I show that monarchs are less likely than non-monarchs to experience political instability, a result that holds across several measures. They are also more likely to respect the rule of law and property rights, and grow their economies. Through the use of an instrumental variable that proxies for a legacy of tribalism, the time that has elapsed since the Neolithic Revolution weighted by Land Quality, I show that this result runs from monarchy to political stability. The results are also robust to alternative political explanations and country fixed effects.

Climate change constitutionalism? Lessons from the United Kingdom

Preventing dangerous climate change presents a significant political challenge. Extensive, urgent, and sustained political action is required to support necessary technological, economic, and behavioural changes. Yet the long-term, global, and uncertain effects of climate change, combined with the substantial short-term costs of mitigation action create what economists term a “credible commitment” problem, given the dominance of material considerations and short-term electoral cycles in political decision-making. Accordingly, building effective climate change law is not simply about devising appropriate measures to reduce emissions, but more fundamentally about instituting legal and political “regime change”. The UK Climate Change Act 2008 represents an important attempt to address the credible commitment problem on a domestic level. Not only does it impose long-term, legally binding emissionreduction targets, it also creates a so-called “carbon accounting” regime, designed to maintain government focus on meeting the targets. The Act involves a “pre-commitment strategy” which is intended to have a systemic and transformative effect on government action, and it has been described as having a “constitutional” significance. The aim of this article is to interrogate this claim to constitutional status. It discusses, first, whether it is appropriate to describe the Act as a constitutional measure and why this classification might matter. Secondly, it considers the likely impact of the Act’s substantive and institutional/procedural provisions. Finally, it considers the wisdom of “climate change constitutionalism”, and asks whether this is an approach which ought to be emulated by other states.

Preferred providers and the credible commitment problem in health insurance: first experiences with the implementation of managed competition in the Dutch health care system

We investigate the impact of the transition towards managed competition in the Dutch health care system on health insurers' contracting behaviour. Specifically, we examine whether insurers have been able to take up their role as prudent buyers of care and examine consumers' attitudes towards insurers' new role. Health insurers' contracting behaviour is investigated by an extensive analysis of available information on purchasing practices by health insurers and by interviews with directors of health care purchasing of the four major health insurers, accounting for 90% of the market. Consumer attitudes towards insurers' new role are investigated by surveys among a representative sample of enrollees over the period 2005-2009. During the first four years of the reform, health insurers were very reluctant to engage in selective contracting and preferred to use 'soft' positive incentives to encourage preferred provider choice rather than engaging in restrictive managed care activities. Consumer attitudes towards channelling vary considerably by type of provider but generally became more negative in the first two years after the reform. Insurers' reluctance to use selective contracting can be at least partly explained by the presence of a credible-commitment problem. Consumers do not trust that insurers with restrictive networks are committed to provide good quality care. The credible-commitment problem seems to be particularly relevant to the Netherlands, since Dutch enrollees are not used to restrictions on provider choice. Since consumers are quite sensitive to differences in provider quality, more reliable information about provider quality is required to reduce the credible-commitment problem.

Two Cheers for Bargaining Theory: Assessing Rationalist Explanations of the Iraq War

The Iraq War has received little sustained analysis from scholars of international relations. I assess the rationalist approach to war—or, simply, bargaining theory—as one possible explanation of the conflict. Bargaining theory correctly directs attention to the inherently strategic nature of all wars. It also highlights problems of credible commitment and asymmetric information that lead conflicts of interest, ubiquitous in international relations, to turn violent. These strategic interactions were central to the outbreak of the Iraq War in 2003. Nonetheless, bargaining theory is inadequate as an explanation of the Iraq War. Although the problem of credible commitment was real, it could not be solved because of the prior beliefs of the Bush administration that Saddam Hussein was uniquely evil and because of Saddam's inability to signal accurately to multiple audiences, both factors now outside bargaining theory. Nor was the problem of private information an important impediment to bargaining; rather, the information failures observed in both Washington and Baghdad were of their own making as each formed self-deluding beliefs and expectations. Bargaining theory also ignores postwar governance costs and domestic interest groups, both of which contributed to the war. All of these problems require either considerable amendments to the theory or the revision of core assumptions. Drawing on this critique, the final sections draw out the analytic and policy lessons of the Iraq War and suggest, most importantly, the need for a new behavioral theory of war.

The Problem of Credible Commitment in the Sphere of Ownership and the Russian Way of Vertical Political Integration

The article is devoted to the relationship of state and business in todays Russia. The author briefly summarizes the history of those relations and shows that due to mutual distrust and lack of incentives with regard to formalization of their interactions as well as to the states inability to provide credible commitments in the sphere of ownership both the state and Russian oligarchs preferred creating a vertically integrated state capitalism in Russia. Such a form of economic organization in this case involves concentration of power in the hands of top officials and bureaucrats and manual management of the national economy based on personal ties.

Administrative capacity, structural choice and the creation of EU agencies

Since the 1990s the EU has established an ever-increasing number of administrative agencies. Their creation has been seen as a result of policy-makers' acknowledgement of a credible commitment problem where trust in the Commission has gradually eroded. This article systematically tests this credible commitment hypothesis. While finding support for it as a normative ideal informing the Commission's governance strategy, there is little evidence of its acceptance by member countries. Rather the design decisions made in the Council of Ministers conform to the predictions of structural choice theory as there is an inverse relationship between the legal authority delegated to agencies and their formal autonomy.

The Middle East and North Africa’s Resilient Monarchs

This article helps explain the variation in political turmoil observed in the MENA during the Arab Spring. The region’s monarchies have been largely spared of violence while the “republics” have not. A theory about how a monarchy’s political culture solves a ruler’s credible commitment problem explains why this has been the case. Using a panel dataset of the MENA countries (1950–2006), I show that monarchs are less likely than nonmonarchs to experience political instability, a result that holds across several measures. They are also more likely to respect the rule of law and property rights and grow their economies. Through the use of an instrumental variable that proxies for a legacy of tribalism, the time that has elapsed since the Neolithic Revolution weighted by Land Quality, I show that this result runs from monarchy to political stability. The results are also robust to alternative political explanations and country fixed effects.

Making an Administrative Trustee Agent Accountable: Reason-Based Decision Making within the Kyoto Protocol’s Clean Development Mechanism

Decisions within the Clean Development Mechanism (CDM) of the Kyoto Protocol are made by an expert body that acts as a trustee agent of the member states. Trustee agents help overcome the credible commitment problems of their principals and promise reason-based decisions. In contrast to traditional principal-agent settings, trusteeship relations are typically triadic. Beside the preferences of the principals and the trustee, decision criteria provide an external point of reference. They reflect the principals’ long-term interest and define the trustee’s decision rationale. The triadic structure helps protect the autonomy of trustees and allows for making them accountable for their decisions. Accountability mechanisms intend to ensure that a trustee’s decisions are in line with established decision criteria. Against this backdrop, we explore the incentives created by the existing institutional arrangement for the making of CDM decisions and examine selected cases. We conclude that CDM arrangements provide a model for nonpartisan international regulation.

The problem of credible commitment in reconstruction*

Reconstruction involves military occupation with the aim of rebuilding and reforming both formal and informal institutions along liberal democratic lines. We contend that successful reconstructions require mechanisms that make reforms credible over the long run. In the absence of a signal of sustained credible commitment, institutional reforms will not be trusted by the populace resulting in the failure of the broader reconstruction. The incentive and epistemic aspects of the credible commitment problem are analyzed. We also consider potential solutions to the problem of credible commitment. Absent such solutions, attempts to ‘export’ institutions via military occupation will fail or produce dysfunctional outcomes. An analysis of the numerous aspects of the credibility problem in the current reconstruction of Iraq is provided to illuminate the central arguments.

The Stabilisation of the Share Price of IPOs in the United States and the European Union

This article analyses, from a comparative law and economics perspective, the regulatory regimes for the stabilisation of share prices during IPOs in the United States and the European Union. It focuses on pure stabilisation, which is the principal form of stabilisation. With respect to ancillary stabilisation, i. e., the overallotment facility and greenshoe option, Germany and Italy are taken as examples for describing the concrete functioning of the discipline in Europe as compared to the United States. First, the article argues that the economic rationality of pure stabilisation may cast doubt on its effective use because of its high potential costs. Furthermore, a credible commitment problem of the syndicate’s intervention may lead to a possible discrepancy between the ratio legis of the prospectus disclosure regime and the ratio legis of pure stabilisation activity. Second, the article shows that the judgement on the proper working of ancillary stabilisation crucially depends on the binding or non-binding character of investors’ adhesions with respect to the final price setting, i. e., on something that is regulated by European law and national contract law.

The Armed Peace: A Punctuated Equilibrium Theory of War

According to a leading rationalist explanation, war can break out when a large, rapid shift of power causes a credible commitment problem. This mechanism does not specify how inefficient fighting can resolve this cause, so it is an incomplete explanation of war. We present a complete information model of war as a sequence of battles and show that although opportunities for a negotiated settlement arise throughout, the very desirability of peace creates a commitment problem that undermines its likelihood. Because players have incentives to settle as soon as possible, they cannot credibly threaten to fight long enough if an opponent launches a surprise attack. This decreases the expected duration and costs of war and causes mutual deterrence to fail. Fighting's destructiveness improves the credibility of these threats by decreasing the benefits from continuing the war and can eventually lead to peace. In equilibrium players can only terminate war at specific windows of opportunity and fighting results in escalating costs that can leave both players worse off at the time peace is negotiated than a full concession would have before the war began.

Perfect Allies? The Case of Iraq and Al Qaeda

Four years after the fall of Saddam Hussein, many scholars and policy makers concluded that an alliance between Iraq and al Qaeda did not exist. Yet the absence of this alliance raises a puzzle: Given their mutual interest in opposing U.S. hegemony in the Middle East, why wasn't there an alliance between Saddam Hussein and Osama bin Laden? In this essay, we develop an explanation for why Iraq and al Qaeda did not ally using previous scholarly work on bargaining and alliances. Our explanation concludes that Iraq and al Qaeda failed to form an alliance due to mutual fears of opportunism and the problem of credible commitment. We conclude by presenting evidence for our explanation and offering a policy prescription for governments facing threats of state sponsored terrorism.

Organizational form as a solution to the problem of credible commitment: The evolution of naming strategies among U.S. hotel chains, 1896-1980

This paper describes how organizational form can solve the problem of commitment that complicates exchange. I illustrate this by analyzing the commitment problem of hotel chains. Consideration of the commitment problem indicates that hotel chains are better off naming their units the same, so as to create the potential for future business from customers. However, some hoteliers believed units should be named differently so they are not identified with the chain. These two strategies illustrate a powerful tension between strategies that allow the organization to be more consistent, and strategies that facilitate adaptation to local conditions. I analyze the failure rates of hotel chains to show that selection favored chains that employed the naming strategy that generates commitment.

THE POLITICAL EVOLUTION OF PRINCIPAL-AGENT MODELS

▪ Abstract With tools borrowed from the economic analysis of insurance, principal-agency theory has allowed political scientists new insights into the role of information asymmetry and incentives in political relationships. It has given us a way to think formally about power as the modification of incentives to induce actions in the interests of the principal. Principal-agency theory has evolved significantly as political scientists have sought to make it more applicable to peculiarly political institutions. In congressional oversight of the bureaucracy, increasing emphasis has been placed on negotiation of administrative procedures, rather than the imposition of outcome-based incentives, as originally conceived. Awareness of the problem of credible commitment has impelled more dramatic reformulations, in which agents perform their function only when their interests conflict with those of the principal, and they are guaranteed some degree of autonomy. The ‘political master’ finds himself in the position of the ‘dilettante’ who stands opposite the ‘expert,’ facing the trained official who stands within the management of administration. ( Weber 1958 )