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An economic theory of mutually advantageous issue linkages in international negotiations

Published online by Cambridge University Press:  22 May 2009

Robert D. Tollison
Professor of Economics and Senior Research Associate, Center for Study of Public Choice, Virginia Polytechnic Institute and State University. Dr. Tollison was formerly a Senior Staff Economist on the Council of Economic Advisers.
Thomas D. Willett
Horton Professor of Economics, Claremont Graduate School and Claremont Men's College. Dr. Willett was formerly a Deputy Assistant Secretary and Director of International Monetary Research at the U.S. Treasury.
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There has been considerable interest in recent years in the question of issue linkages in international negotiations. What is significant about discussions of linkages in the present era is the stress put on making trade-offs explicit among issues. Most of the highly publicized cases of proposed issue linkages appear to have been motivated by attempts of individual countries or groups of countries to extend their dominant bargaining or veto power in one particular issue area into other areas so as to achieve maximum advantage from their whole array of international interactions. The existence of an additional rationale for linkage that relies upon mutual interest has important implications. Drawing on the economic theory of exchange, the use of issue linkages to facilitate the completion of a greater number of mutually beneficial agreements among nations is considered.

Copyright © The IO Foundation 1979

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We are grateful to Robert O. Keohane and to two unidentified referees of this journal for useful comments on an earlier draft of this paper. The usual caveat applies.

1 See, for example, the discussion in Keohane, Robert and Nye, Joseph, Power and Interdependence (Boston: Little, Brown, and Co., 1977)Google Scholar, and Gosovic, Branislav and Ruggie, John Gerard, “On the Creation of a New International Economic Order: Issue Linkage and the Seventh Special Session of the U.N. General Assembly,” International Organization 30 (Spring 1976): 309346Google Scholar.

2 Wallace, William, “Issues Linkage Among Atlantic Governments,” International Affairs (04 1976): 163179Google Scholar.

3 See the section on “Towards a Theory of Optimal Negotiations,” in Tollison, Robert D. and Willett, Thomas D., “Institutional Mechanisms for Dealing with International Externalities: A Public Choice Perspective,” in The Low of the Sea: U.S. Interests and Alternatives, Amacher, Ryan C. and Sweeney, Richard J., eds. (Washington, D.C.: American Enterprise Institute, 1976), pp. 97100Google Scholar. Within the context of fiscal federalism this aspect of issue linkages is stressed in Breton, Albert, “Public Goods and the Stability of Federalism,” Kyklos 23 4 (1970): 882901CrossRefGoogle Scholar. This rationale is also briefly alluded to, but not emphasized, in Keohane and Nye, op. cit., p. 122, where they mention that “reinforcing this [power] impetus toward linkage was the inclination, particularly of Third World majorities at international conferences, to link issues to secure satisfactory overall bargains.”

4 Economists and other scholars have analyzed alliances from a public-goods perspective. See Olson, especially Mancur and Zeckhauser, Richard, “An Economic Theory of Alliances,” Review of Economics and Statistics 48 (08 1966): 266279CrossRefGoogle Scholar; id., “Collective Goods, Comparative Advantage, and Alliance Efficiency,” in Issues in Defense Economics, McKean, Roland N., ed. (New York: Columbia University Press, 1967), pp. 2563Google Scholar; Frolich, Norman and Oppenheimer, Joel A., ”I Get By With a Little Help From My Friends,” World Politics 23 (10 1970): 104120CrossRefGoogle Scholar; Russett, Bruce M. and Sullivan, John D., “Collective Goods and International Organization,” International Organization 25 (Autumn 1971): 845865CrossRefGoogle Scholar; Olson, Mancur, “Increasing the Incentives for International Cooperation,” International Organization 25 (Autumn 1971): 866874CrossRefGoogle Scholar; and Loehr, William, “Collective Goods and International Cooperation: Comments,” International Organization 27 (Autumn 1975): 421–43CrossRefGoogle Scholar.

5 For convenience we make the hypothetical assumption that decision makers’ evaluations of benefits and, later, of utilities can be expressed in dollar terms.

6 The latter terminology in the present context refers to the capture of the benefits of agreement by the two countries relative to the previous case in which the inability to make side payments led to a lack of agreement and to the loss of such potential benefits.

7 We defer considerations of the costs of decision making until the next section, but it should be apparent here that where ZY is small, the attempt to link issues may cost more than it is worth.

8 Although we did not analyze the increasing-costs case in the text, it is easy to understand how unlinked agreement is facilitated under these conditions. Namely, where the cost of alliance production rises monotonically in each country, the conflict between alliance efficiency and distributional effects dissipates, that is, the objective of maximizing potential welfare (a least-cost allocation of production) becomes more congruent with spreading production fairly evenly among countries.

9 There is considerable literature oh this question emanating from a paper by Downson, AnthonyWhy the Government Budget is Too Small in a Democracy,” World Politics 12 (07 1960): 541563CrossRefGoogle Scholar. For a review of this literature, see Amacher, R. C., Tollison, R. D., and Willett, T. D., ”Budget Size in a Democracy: A Review of the Arguments,” Public Finance Quarterly 3 (04 1975): 99121CrossRefGoogle Scholar.

10 Keohane, R. O. and Nye, J. S., “Transgovernmental Relations and International Organizations,” World Politics 27 (11 1974): 3962CrossRefGoogle Scholar.

11 For a general discussion of this point with references to the literature, see Mueller, D. C., Tollison, R. D., and Willett, T. D., “Solving the Intensity Problem in Representative Democracy,” in The Economic Approach to Public Policy, Amacher, R. C., Tollison, R. D., and Willett, T. D., eds. (Ithaca, New York: Cornell University Press, 1976), pp. 444473Google Scholar.

12 Uncertainty over the proper direction for policy does not, however, imply that there will not be issue trades in any event.

13 Wallace, op. cit. We should stress, however, that this is a complicated problem and that under some circumstances linkage can be used to bring about agreement irrespective of poor understanding or of fundamental disagreements over proper policies. A helpful referee gives the following example. At the time of the Bretton Woods Conference the U.S. and U.K. disagreed particularly over the question of the role of discriminatory trading blocs in the postwar economic order. The U.S. linkage of Lend Lease and postwar credits to the dismantling of Imperial preferences helped bring about an agreement.

14 Two recent papers in International Organization are closely related to this theme. See Katzenstein, Peter J., “International Relations and Domestic Structures: Foreign Economic Policies of Advanced Industrial States,” International Organization 29 (Fall 1975): 10211034CrossRefGoogle Scholar; and Hopkins, Raymond F., “The International Role of Domestic Bureaucracy,” International Organization 30 (Summer 1976): 405432CrossRefGoogle Scholar.

15 This point has not yet been sufficiently recognized in discussions of the optimal provision of international public goods. For example, in their classic paper An Economic Theory of Alliances,” Review of Economics and Statistics 48 (08 1966): 266279CrossRefGoogle Scholar, Olson and Zeckhauser show how the failure to have collective agreements can result in the underprovision of international public goods, but fail to consider how in this model the ability to achieve optimality through binding international agreements would not be invariant to the voting rules adopted. For further discussion on this point, see Robert D. Tollison and Thomas D. Willett “International Public Goods and the Economic Theory of Alliances,” in The Challenge of Economic Interdependence: A Public Choice Perspective(in progress). For recent discussions of the Olson-Zeckhauser model, see the references cited in footnote 4.