![1 Introduction
What is so particular in the state of war? Does the involvement into an external
conflict create forces that elude the usual scope of economics? Surely, the question
of war is puzzling. And, surely, it is all the more since the usual scope of economics
underscores its irrationality. War is costly: it burns resources, spoils capital, wastes
labor, destroys consumption goods. Certainly, if the countries’ representatives
were rational, if they could value their respective probability of winning, if they
could credibly bargain to divide the disputed good, then, war should not occur.
But wars occur.
One could argue that the breach of any of the listed conditions could provide
an explanation to the occurrence of conflicts. Economists have indeed developed
extensive theories and rigorous frameworks in order to emphasize the major role
of these conditions in the viability of peace. Yet, a simpler economic argument
could elucidate the seeming paradox: what if the benefits actually outweighed the
costs? What if the apparent ine ciency of war disregards its substantial benefits,
which do not restrict to monetary or territorial aspects?
Our idea lies precisely in this caveat. There have been several instances of models
incorporating alternative arguments regarding the role of war; for instance: the
leader’s interests in war diverge from those of his population [Jackson and Morelli,
2007]; the war discloses information on the true potential of the leader in an envi-
ronment of imperfect information [Richards et al., 1993]; an additional parameter
conditionally enters the specification in times of conflict [Arena and Bak, 2013];
the domestic unrest creates opposing forces that can, to some extend, benefit the
leader [De Luca et al., 2011]. We propose yet another facet of the unconventional
benefits of war: international disputes help establishing domestic power.
Our model means to emphasize this mechanism by using the simple framework of a
game with two domestic players; therefore, rather than examining the simultaneous
will for two countries to engage in a war, we focus on the internal motivations for
one country to instigate war. We then argue that being in an external conflict
deters the population from revolting, since the latter would translate into a certain
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- 1. University of Lausanne Master’s Thesis Threat of War and Voluntary Enchainment Author: Melika Liporace Supervisor: Prof. Dominic Rohner Expert: Prof. Mathias Thoenig A thesis submitted in fulfilment of the requirements for the degree of Master of Science in Economics in the Department of Econometrics and Political Economics at the HEC Faculty of the University of Lausanne January 2016
- 2. Acknowledgements I would like to thank my supervisor Prof. Dominic Rohner, for his patience and his flexibility. I was lucky enough to have the chance to work with him. He guided me when I was lost, and he withstood me when I was late. He provided precious advice, be they technical, professional or personal. He proved to be extremely insightful more than once and supported my choices when I was doubting myself. He trusted me from the top, and I can only be grateful for the motivation it gave me. I also would like to thank my expert Prof. Mathias Thoenig, for his time and his availability. He gracefully endorsed my demand and accepted to be part of my graduation process. He revealed himself to be accessible and accommodating. It is a great privilege to have him as my expert and I am indebted for his compliance. On a more personal level, I would like to acknowledge the friends that helped me during this challenging process. Their kind suggestions and pertinent remarks proved perspica- cious, clever, and so helpful. Their support was as personal as it was intellectual. Jad, Filip, Hormoz, Felix, I want to cite you personally for the precious hours you devoted to me: you contributed to my work more than you imagine. I owe you. (Yes, I do!) To my family and my closest friends, who endured my moodiness, my doubts and my concerns: an humongous thank you. They kept on encouraging me, even when I was failing. They unconditionally believed in me, and gave me the energy to go on when I wanted to give up. Unlike mine, their kind words did not need pomposity and their love was concise. Thank you. Lastly, I simply wish to thank God for making everything possible. ii
- 3. Contents Declaration of Authorship i Acknowledgements ii Contents iii Abstract v 1 Introduction 1 2 Literature Review 4 2.1 Paradox of War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2 Benefits of War . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.3 Diversionnary Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.3.1 Principles and Stances . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.3.2 Economic Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.3.3 Empirical Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.4 Further Disrupt of the Unitary-Actor Assumption . . . . . . . . . . . . . 9 2.4.1 Partition and Extraction . . . . . . . . . . . . . . . . . . . . . . . . 9 2.4.2 Intentional Ine ciency . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.5 Political Regime as Commitment Device . . . . . . . . . . . . . . . . . . . 11 2.6 Contribution to the Literature . . . . . . . . . . . . . . . . . . . . . . . . 12 3 Baseline Model: Extraction, War and Liberty 15 3.1 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.2 Setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.2.1 Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.2.2 Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.2.3 Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.2.4 Payo↵s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.3 Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.3.1 Backward Induction Analysis . . . . . . . . . . . . . . . . . . . . . 19 3.3.2 Characterization of the Equilibrium . . . . . . . . . . . . . . . . . 22 3.4 Interpretation and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.4.1 Role of the Parameters . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.4.2 Assumptions and Extensions . . . . . . . . . . . . . . . . . . . . . 27 iii
- 4. Contents iv 4 Extended Model: Two Levels of Conflict 29 4.1 Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.2 Setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.2.1 Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.2.2 Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4.2.3 Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4.2.4 Payo↵s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.3 Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.3.1 Backward induction analysis . . . . . . . . . . . . . . . . . . . . . 33 4.3.2 Characterization of the Equilibrium . . . . . . . . . . . . . . . . . 37 4.4 Interpretation and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.4.1 Role of the Key Conditions . . . . . . . . . . . . . . . . . . . . . . 39 4.4.2 Role of the Key Parameters . . . . . . . . . . . . . . . . . . . . . . 40 4.4.3 Particular Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 4.4.4 Diversionary Incentive and Rally around the Flag . . . . . . . . . 46 5 Historical Evidence: Anecdotical Examples 50 5.1 Case Study: The Franco-Prussian War . . . . . . . . . . . . . . . . . . . . 50 5.1.1 Historical Context . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 5.1.2 Link with the Model . . . . . . . . . . . . . . . . . . . . . . . . . . 54 5.2 Documented Analysis: the Cold War . . . . . . . . . . . . . . . . . . . . . 58 5.2.1 Historical Context . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.2.2 Link with the Model . . . . . . . . . . . . . . . . . . . . . . . . . . 61 5.3 Diverse Anecdotes: Brief Examples . . . . . . . . . . . . . . . . . . . . . . 64 6 Conclusion 66 A Baseline Model: Mathematical Details 69 A.1 Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 A.1.1 Backward Induction Analysis . . . . . . . . . . . . . . . . . . . . . 69 A.1.2 Characterization of the Equilibrium . . . . . . . . . . . . . . . . . 72 B Extended Model: Mathematical Details 73 B.1 Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 B.1.1 Backward induction analysis . . . . . . . . . . . . . . . . . . . . . 73 B.1.2 Characterization of the Equilibrium . . . . . . . . . . . . . . . . . 78 B.2 Interpretation and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . 80 C Extended Model: Logical conditions for the SPE 83 C.1 List of Conditions and Relationships . . . . . . . . . . . . . . . . . . . . . 83 C.2 Summary of the Cases and Associated Decisions . . . . . . . . . . . . . . 84 C.3 Derivation of the Logical Condition by Outcome . . . . . . . . . . . . . . 85 C.3.1 Condition for War . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 C.3.2 Condition for Tensions . . . . . . . . . . . . . . . . . . . . . . . . . 86 C.3.3 Condition for Peace . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Bibliography 88
- 5. Threat of War and Voluntary Enchainment Abstract We propose a model to justify the occurrence of external conflicts, which focuses on the unconventional incentives to initiate war. Specifically, we argue that the state of war bolsters the domestic power, which can be used to implement demanding policies. The threat posed by the involvement in a conflict deters the population from attempt- ing a revolution, which would result in an external defeat that would translate into a decrease in welfare, through conquest, discrimination or loss of international credibility. We derive the conditions under which this threat is su cient to induce the population to relinquish their liberty to rebel as a mean to avoid war. Our framework enables to underscore how voluntary enchainment can be both rational and socially e cient. We draw upon these conclusions to build an extension presenting an alternative way to com- mit in the short term, where commitment means are not perfectly flexible. Particularly, we assume that the popular support of a belligerent foreign policy fulfills this role, which enables to provide a rationale for behaviors often described as irrational. We can thus formally derive the conditions necessary to gather such a support, which creates new motives for the leader to instigate a conflict. Our setup permits to explicitly show how the mere anticipation of popular support can be an incentive su cient to engage into in- ternational tensions. Historical cases are presented in order to support our conclusions. ”It does not matter whether the war is going well or badly. All that is needed is that a state of war should exist.” George Orwell, 1984
- 6. 1 Introduction What is so particular in the state of war? Does the involvement into an external conflict create forces that elude the usual scope of economics? Surely, the question of war is puzzling. And, surely, it is all the more since the usual scope of economics underscores its irrationality. War is costly: it burns resources, spoils capital, wastes labor, destroys consumption goods. Certainly, if the countries’ representatives were rational, if they could value their respective probability of winning, if they could credibly bargain to divide the disputed good, then, war should not occur. But wars occur. One could argue that the breach of any of the listed conditions could provide an explanation to the occurrence of conflicts. Economists have indeed developed extensive theories and rigorous frameworks in order to emphasize the major role of these conditions in the viability of peace. Yet, a simpler economic argument could elucidate the seeming paradox: what if the benefits actually outweighed the costs? What if the apparent ine ciency of war disregards its substantial benefits, which do not restrict to monetary or territorial aspects? Our idea lies precisely in this caveat. There have been several instances of models incorporating alternative arguments regarding the role of war; for instance: the leader’s interests in war diverge from those of his population [Jackson and Morelli, 2007]; the war discloses information on the true potential of the leader in an envi- ronment of imperfect information [Richards et al., 1993]; an additional parameter conditionally enters the specification in times of conflict [Arena and Bak, 2013]; the domestic unrest creates opposing forces that can, to some extend, benefit the leader [De Luca et al., 2011]. We propose yet another facet of the unconventional benefits of war: international disputes help establishing domestic power. Our model means to emphasize this mechanism by using the simple framework of a game with two domestic players; therefore, rather than examining the simultaneous will for two countries to engage in a war, we focus on the internal motivations for one country to instigate war. We then argue that being in an external conflict deters the population from revolting, since the latter would translate into a certain 1
- 7. Introduction 2 defeat in the front. This additional incentive for the population to accept the domestic policies in times of war, on which our model lies, enables the leader to implement more demanding policies. An external conflict however creates two counter-acting forces: on one hand, as mentioned, it allows to enforce a domestic pressure, translating into an increase in tax rate; on the other hand, it causes resources to be wasted, translating into a decrease in tax base. We formally study this tradeo↵. We then question the role of the population in the occurrence of war. We wonder whether war, given these benefits, is always Pareto optimal. We thus study the conditions under which the population is willing to voluntary renounce to a part of her welfare in order to avoid the ine ciencies of war. Particularly, we assume that the population can relinquish their liberty to rebel by willfully decreasing their opportunities to revolt, which translates into an increase in the costs of uprising. Our setup permits to emphasize how this voluntary enchainment is both rational and socially e cient. Our model provides interesting results. More than justifying seemingly puzzling behaviors such as the decision to initiate war or the will to restrict the access to uprising opportunities, it supplies a rigorous framework in which the impor- tance of interrelations between apparently unrelated parameters, can be studied. Specifically, it underscores how the will to exogenously provide access to revolution facilities can be counter-e↵ective in an environment where other tools of kleptoc- racy, such as war, can be implemented at low-cost. In opposition, the major role of the cost of fighting in the occurrence of war can for instance be used to prevent conflict. Finally, our results emphasize the crucial importance of the external en- vironment on the internal policies, by suggesting that a country whose neighbors are aggressive is more prone to domestic extraction and ine cient policies. We then extend our setup to account for two elements ignored previously, that are: the discrepancy between di↵erent intensities of conflict; and the imperfect flexibility of commitment means. Therefore, we crudely include the possibility for conflicts to vary in level by modeling the occurrence of open war in two distinct steps, low- and high- level conflict. As for the commitment, rather than the long term process displayed in the baseline model, we assume that a public support of a belligerent foreign policy constitutes a way to commit in the short term, which mainly drives the results. More than delivering results consistent with our previous model, this setup yields two crucial conclusions. First, it provides a rational ground for seemingly para- doxical supportive behavior, and enables to rigorously underscores the necessary conditions for such support; second, it derives the circumstances under which a conflict is initiated for the mere motivation of gathering the popular support, which in fine contributes to bolster the domestic power. Although well-documented in
- 8. Introduction 3 various literatures, from historians to political scientists, to economists; these con- cepts had, to the best of our knowledge, never been formalized in an economic setup. Formally, we assume that support occurs as a mean to avoid an escalation of international violence. Hence, it must deter the leader from engaging into an open war, which would otherwise be both credible and unavoidable; and be bene- ficial for the population, who could still prefer open war otherwise. We also find that, when neither low nor high-level conflict would be beneficial to the leader without the possibility of commitment, the anticipation of a popular support can be su cient to trigger conflict. On the back of these theoretical considerations, we provide historical cases, whose pattern seems to match our considerations. Specifically, we consider the Franco- Prussian war of 1870 to show how war has been designed as a necessary tool to bring independent states to relinquish their sovereignty and rally Germany. Furthermore, we also exploit the case of the Cold War, to underline how the durable threat posed by the West has been a mean for the Soviet government to successfully implement impoverishing policies. Finally, we briefly discuss other various examples, mainly by considering long-time enmities between countries, which could therefore use the outbreak of a conflict in a threatening environment. The development proceeds as follows. Section 2 presents the literature pertaining to our model, and pinpoints our contribution to it. Section 3 formally defines and solves our baseline model. Section 4 exposes and exploits our extension. Section 5 provides historical evidence. Section 6 concludes. Appendices A, B, C supply mathematical details.
- 9. 6 Conclusion In this work, we proposed a model to understand the occurrence of seemingly paradoxical external conflicts; it particularly underlined unconventional benefits of war: rather than being monetary gains extracted from the opponent, they can be political gains extracted from the proponents. We have indeed argued that a leader can implement policies that are more austere in times of war because the population would su↵er an international defeat by domestically initiating a revolution. War then seems advantageous to the leader when the benefits made possible by the external threat outweigh the costs of war. We have underlined the importance of the potential benefits in each state of the world in order to predict the occurrence of war; particularly, when the costs of rebellion are low, the extraction in time of peace is marginal, and the leader wishes to use other means of extraction, such as external violence. For this reason, we have argued that the population may be willing to relinquish the revolution facilities in order to deter the leader from using ine cient means of extraction; this decision proved to be socially e cient. In particular, we have underlined that increasing the costs of war might turn out to be more e cient to increase popular welfare than a mere intervention on the opportunities of rebellion, which could be counter-e↵ective. Furthermore, we emphasized the key role of the environment in the determination of both external and internal policies; in particular, countries bordering aggressive, discriminative, undemocratic neighbors tend to su↵er from undesirable policies, either by the outbreak of external violence, or by the enforcement of internal pressures. We have also reconsidered the main assumptions of our model in order to present an extension where the intensity of conflict could vary, and the commitment means would not be perfectly flexible. We have indicated how the public endorsement of the leader’s belligerent aspirations could qualify as commitment. After having extensively examined the possible outcomes in equilibrium, the results appeared similar but more subtle than those of our baseline model. We thus established that the rallies around the flag sometimes observed in times of international tensions can be rational, since they can be a mean to avoid war. Specific conditions should 66
- 10. Conclusion 67 be met to justify the popular support: war should be beneficial, so that the threat of war is credible, but not too beneficial, so that the commitment is su cient to deter the leader from attempting war; furthermore, support should not be too expensive, so that the population is willing to commit. These conditions let space to the possibility for the conflict per se to be disadvantageous for the leader, but for the anticipation of support to still induce him to initiate tensions. While restricted by numerous constraints, we showed that the set of parameters satisfying these condition was non-empty, thus formalizing the diversionary incentive. Finally, we showed that historical instances seem to match these patterns. After a detailed presentation of the historical facts, we fastidiously drew the parallels between theory and reality. In particular, we considered that the Franco-Prussian war illustrated the crucial importance of the evaluation of the external threat to account for the popular choices; we demonstrated how this war has been cleverly designed as a political tool to implement policies otherwise rejected; we also un- derlined that the re-evaluation of the external threat lead to a relinquishment of liberties. We additionally examined the Cold War in order to underscore the in- terrelations between internal obedience and external menace. Given the particular nature of this war, several alternatives were presented in order to fit our setup to the case; the underlying argument still stood: the war, or its threat, was used to bolster the domestic power and to implement demanding policies. Other mi- nor instances were also presented, in order to show how the external threat could be embodied. Usually, these cases would involve long-lasting hostilities between countries, or a general international state of enmities. While our models yield interesting and innovative results, many elements could be developed in many directions. An obvious aspect concerns the empirical credibility of our conclusions. While our work has solid theoretical bases, statistical evidence has yet to be searched. In particular, the documented link between external war and internal support should be further tested given our recommendations. Since our work provides clear predictions on the role and e↵ects of specific parameters for the presence of a diversionary incentive, a rigorous empirical analysis accounting for these conclusions would bring interesting results. In a theoretical perspective, the first aspect of extension could concern the cer- tainty of the payo↵s inherent to our assumptions. To account for randomness, we could introduce imperfect information. The players could be uncertain about the anterior decisions of the game, which would enable the occurrence of unwanted outcome, such as revolution. In particular, we could allow for discrepancies be- tween the actual value of the parameters, the value accounted by each agent, and the beliefs about these values, implying an imperfect inference of the other player’s
- 11. Conclusion 68 strategy. Specifically, it could be interesting to study how the credibility of the dif- ferent threat and commitment would evolve; and how popular support, more than implicitly engaging the population, could convey information. Another element pertaining to uncertainty could be the introduction of stochastic outcomes; while exogenous stochasticity should lead to substantially similar result as noted in Section 3.2.4 endogenizing the probabilities of success could lead to intriguing results. Particularly, it could be interesting to incorporate the intensity of fighting in a continuous setup, such that war creates a price shadow through opportunity costs; the probability of victory would be dependent of such war e↵ort. In such a context, the question of bilaterally arises naturally. While, for clarity concern, we purposely ignored this issue throughout our argumentation, it could warrant additional analysis. Would open war require belligerence from both sides to occur? Would a pacific opponent weaken the diversionary incentive? While these issues should be solved in the modeling choices of such an extension, other potentially interrogations would also require further attention. For instance, by in- troducing the possibility for an agent to influence the value of the external threat, one could be compelled to analyze the respective evolution of this parameter’s values. Would they progress in the same direction, or, to the contrary, tend to diverge? Determining the interrelation between these factors could also in- dicate whether, in a bilateral context, the diversionary incentive tends to be a self-reinforcing behavior. It would naturally lead to the questions of dynamics and overall trend in the long term. Eventually, all these elements could be considered in a DGSE model. Such modeling would obviously require further investigation, which goes far beyond the scope of our analysis.