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Costly Adjustments, Markets and International Reassurance

  • Johannes Urpelainen

Abstract

Two leaders engaged in international co-operation must each build trust by credibly signalling that they will not exploit the other by defecting at the implementation stage. Previous research does not reveal the difficulty and cost of such international reassurance. The role that costly adjustments by markets play in international reassurance is analysed, showing that fully efficient information revelation can be achieved when market actors under intense competitive pressures undergo sufficiently costly adjustments in expectation of international co-operation. ‘Nice’ leaders can reveal their true preferences simply by saying they intend to co-operate, because ‘mean’ leaders are unwilling to mislead market actors into undergoing futile costly adjustments. However, market imperfections prevent full information revelation unless market actors prefer international co-operation to the status quo.

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57 In what follows, it is important to recall that all results are specific to this particular equilibrium. The game has other equilibria, such as those do not involve any cheap talk by the leaders, but here I focus only on finding an optimal equilibrium that minimizes the cost of co-operation.

58 The number of market actors is large, so a deviation by any individual market actor is ignored by both leaders.

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77 Finding an example of a monopolist actively preventing reassurance would be difficult. If reassurance is expected to fail, the leaders have no incentive to try to reveal information. Thus, the monopolist's attempt to prevent reassurance would remain ‘off the equilibrium’.

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* Department of Political Science, Columbia University (email: ). The author wishes to thank Leonardo Baccini, Terry Chapman, Yoram Haftel, Yotam Margalit, Krzysztof Pelc, Paul Poast, Dustin Tingley, Scott Wolford, and a seminar audience at Princeton University for valuable insights.

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