Nuffield College Working Papers Series in Politics A Different Kind of Game: International Cooperation in Mercosur Christian Arnold , Latin American Centre, University of Oxford Email: [email protected] 2 | WP-2013 CHRISTIAN ARNOLD
Abstract: Compliance is a key concern in international cooperation, because contracting
is based on the reliability of all partners. Typically, free-riding is believed to be its main
impediment in international relations. This paper presents an institutional outlier that
solves this issue, but only to the cost of other strategic inefficiencies. In the Southern
Common Market (Mercosur), its four member states Argentina, Brazil, Paraguay and
Uruguay cannot benefit from the efforts of others, but are rather inclined to make false
promises. Normally, international agreements turn out to be legally binding once a state
ratifies the international contract at the domestic level. In Mercosur, policies are legally
binding only when all four countries have ratified it. Given Mercosur’s weak provisions for
enforcement, actors prefer to reap benefits from contracting alone, knowing that they can
de-facto veto it easily at a later stage. The paper offers a formal model in the appendix
which shows the consistency of the argument. It substantiates the theoretical claims with
the statistical analysis of Mercosur’s complete ratification record of all 1033 regulations
between 1994 and 2008.
Keywords: Free-Riding, Mercosur, Public Goods, Ratification
Short Bio: Christian Arnold is a Departmental Lecturer at the Latin American Centre
at the University of Oxford. His research interests include international cooperation with
a particular view on the creation, change and effect of international institutions. Previous
to his current post, he completed his Ph.D. at the Graduate School of Economic and
Social Sciences at the University of Mannheim in 2012.
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 3
1 Contracting, Ratification and Compliance in International
Cooperation
Non-compliance is a key concern in international cooperation. Typically, free-riding is believed
to be rational actors’ main impediment to put pacts into practice. Only severe sanctions or
imminent image loss are said to be capable of moderating such shirking. However, free riding
can not only be mitigated–it can actually be solved: The modification of ratification rules substantially alters the incentives of those who produce public goods. If only the ratification of
the last contracting partner makes policies legally binding to everybody, all sides always have
incentives to put beneficial contracts into practice. But this solution comes to a prize. While
such ratification rules solve one cooperation problem, they may yet further another one. If nonratifiers need not fear consequences, they may be be tempted to first sign an agreement and then
prevent the eventually costly adaption. Such inefficient contracting always leads to cooperation
for beneficial policies, but brings about inflationary adoption of international agreements. In
sum, non-ratification remains an issue, although its reasons and solutions are inherently different.
International cooperation consists of two steps. Governments contract on common future conduct. But authorities still need to keep their promise from the negotiation tables and have to
alter their behaviour in line with the terms of an agreement. The ratification of international
agreements is a key step towards such compliance: Entrusting domestic courts with surveying and sanctioning non-compliance, the incorporation of international rules into domestic law
allows national courts to hold their governments accountable. Both stages of international cooperation challenge actors in different ways. Acting rationally, they only consent to international
agreements if they expect a positive reward from doing so. First and foremost, they seek to
change the status quo of international cooperation, thereby solving distributional conflicts and
coordinating on one among many possible pareto-optimal outcomes (Fearon 1998; Krasner 1991;
Stein 1983).
Those who sign international agreements may yet be interested in other gains from agreements
than a mere change in the status quo. When bargaining over outcomes, governments know that
their signature can serve as an important signal to seek support from domestic or transnational
advocacy groups. At the international level, joining alliances informs about the association to
a certain group of states (Long et al. 2007). Young democracies present their country as a safeguard for investments and trade (Büthe and Milner 2008; Simmons 2000; Goodliffe et al. 2012).
In a similar vein, domestic audience costs bolster governments’ reputation for specific courses of
action (Dorussen and Mo 2001; Fearon 1994; Mansfield et al. 2002; Tomz 2007).
Then again, governments may also target domestic actors. Democratically elected leaders cherish the opportunity to present themselves as international statesmen (Rogoff 1990; Whitehead
and Barahona de Brito 2005). Governments seek the support from domestic pressure groups in
economic affairs (Baccini and Dür 2012; Urpelainen 2011) or human rights (Keck and Sikkink
1998; Price 2003; Sikkink 1993). Finally, leaders can use potential audience costs at the international level to lock-in policy reforms domestically (Chapman 2007; Fang 2008; Moravcsik 2000).
4 | WP-2013 CHRISTIAN ARNOLD
Country leaders may even want to create distinct reputations with regard to different audiences.
They can try to maintain a country’s image as a reliable economic partner at the international
level. In the meantime, democratically liable governments need to safeguard national interests
and may try to undermine binding international contracts with means less visible to foreign
partners (Kono 2006).
Once all parties come to an agreement, cooperation problems change fundamentally. International relations stress cooperation problems where each contracting party has incentives to save
on the costs for adaption and hope for others providing the collective good (Keohane 1984; Oye
1985; Snidal 1985). Actors may overcome incentives to renege on cooperative behaviour when
institutions impose costs on those who defect.
Explicit sanctions compel non-compliers to stick to the cooperative behaviour they initially
promised. International enforcement institutions such as courts or tribunals can increase costs
for non-compliance remarkably (Alter 2002, 2006; Carrubba 2005; Downs et al. 1996; Gilligan
et al. 2010). Domestic institutions may play an important role in sanctioning their own governments, too (Hathaway 2007). National courts (Hathaway 2003; Powell and Staton 2009) or
interest groups (Dai 2006) may hold the own governments accountable. When international
organisations harness domestic counterparts, international and domestic institutions may commonly exert such pressure on governments (Koremenos et al. 2001). Institutions permit not
only explicit, but also implicit ways of retaliation. The reputation of a government effectively
defines whether partners are willing to cooperate again (Axelrod 1984; Guzman 2008; Hathaway
2005; Keohane 1984; Oye 1986). Domestically, governments can use ratification to either avoid
audience costs from pressure groups with a stated interest in the passage of international rules
to the domestic level (Dai 2007) or create audience costs to reinforce pronounced policy reforms
(Simmons and Danner 2010).
In addition to all such effects on the costs and benefits of public goods, the effect of ratification
rules on strategic behaviour in international cooperation has not received attention. If the last
country to ratify an international agreement determines the overall validity from international
contracts, signatory states do not produce the collective good unless even the last partner has
successfully ratified. The short term incentives for individual defection can not arise. In consequence, all partners prefer to adapt policies rather than to defect from a mutually beneficial
agreement.
Solving free riding by such institutional means, however, does not eliminate cooperation problems. It merely alters their nature. Those who cooperate under such a regulatory regime may
feel tempted to make promises they do not intend to keep. If costs from non-compliance are
sufficiently low, those who contract may want to assure gains from contracting now. Under such
circumstances, actors may sign contracts, because they can easily prevent the policies’ eventual
negative effect by refraining from ratification.
The paper empirically illustrates these theoretical considerations with Mercosur, a regional integration scheme between Argentina, Brazil, Paraguay and Uruguay. The analysis of the ratification record on all 1033 regulations adopted between 1994 and 2008 empirically shows the
effects that arise when only the ratification of the last member country determines their overall
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 5
legal validity. Policies which are typically prone to free riding, such as those concerning the
common external tariff, are ratified without further ado. Nevertheless, non-ratification remains
a substantial issue: Against the backdrop of Mercosur’s low capabilities for implicit and explicit
sanctions, governments have incentives to adopt inefficient contracts. When delegations benefit
from the mere act of signing an agreement–for example in the form of a signal to international
or domestic partners–they may be willing to first sign even costly policies and second strongly
delay subsequent incorporation into domestic law to avoid expensive adaptions of behaviour.
Non-ratification remains an important issue, but it is rather inefficient contracts than free riding
that are the cause of all trouble.
2 How Ratification Rules Affect Incentives in International
Cooperation
At a fundamental level, countries coordinate policies because a common course of action allows
them to produce public goods. Ratification rules decisively affect governments’ incentives from
international cooperation: they determine who benefits when from the joint efforts and therefore
influence how much effort each side puts into compliance. Incentives for free riding may arise, if
a regulation takes effect in a particular country once this country incorporates it domestically.
Another state may then find it rational to benefit from its partner’s effort without incurring the
costs for adaption itself. In contrast, if the last country to enact an agreement triggers legal
validity for everybody, positive effects can only arise once all sides ratify.
While the second set of ratification rules paint an all to merry prospect of international cooperation, the picture is not complete without the consideration of reputation–both, reputation that
can be gained from signing an agreement and reputation from actually incorporating agreement
into domestic law. In a situation where a party has little to fear from the neglect of the latter,
contracting alone may be a signal worth sending and may make the adoption of costly policies
tempting. Given the immediate benefit from the accord, signatures become an easy, but empty
gesture. Those who approve such agreements may reap the benefit from the signature, because
they know that they can easily circumvent future legal obligations with delayed ratification.
2.1 Providing Public Goods with Linear and Step-Level Production
Functions
Producing public goods requires the effort of all partners. Intuitively, the more sides contribute
to its production, the more of the good can be provided. Yet, the partners’ individual contribution may differ and depend on the rules the partners set for the provision of the public
good (Elster and McPherson 1993; Schelling 1973; Frohlich and Oppenheimer 1970; Frohlich
et al. 1975). Many different rules are thinkable, but two cases are of particular relevance in this
context: If each party’s effort increases the overall provision by a similar degree, they produce
their good with a linear production function. Then again, if only the cooperation of all sides
triggers the supply of the public good, the production function takes a step and jumps from the
provision of no good at all to its full provision.
6 | WP-2013 CHRISTIAN ARNOLD
Incentives for and challenges from collective action depend on the form of these production
functions. In the first case, individuals can benefit from withholding their participation. The
public good is at least partially provided as long as some of the partners invest in the costly
adaption of behaviour. Individual parties seek to “free-ride” on the effort of others. In contrast,
step-level goods are only produced once all sides comply with the terms of the agreement. If
only one of the partners fails to do so, all sides are deprived from the benefits of joint action.
Everybody is therefore eager to keep the promises from the negotiation and no incentives for
free-riding result.
In international relations, rules for ratification determine the production function of public goods.
In the first case, no central authority exists which could be capable of compelling defectors into
compliance. Governments decide whether to keep their promise only against the backdrop of
eventual sanctions or reputation concerns (Carrubba 2005, 2009; Garrett 1992). Implementing
the terms of an agreement means bearing the costs for the adaption. But given authorities
refrain from doing so, they may save such expenses, hope for their partners to invest efforts and
benefit from the at least partially provided good.
When the last country to ratify triggers the overall validity of an international agreement, the
partners produce their good with a step-level function. An international agreement only becomes
legally binding once all sides have put it into domestic law. Now, national courts watch over
governments’ behaviour and can effectively prosecute non-compliance–which has an important
effect on the incentives for cooperation. Only joint efforts trigger actual policy change. Each
individual party is therefore eager to keep its promises and seeks to invest in policy adaption.
Unlike before, governments are offered no reward for non-compliance with their obligations from
international agreements.
2.2 Step-Level Good Provision and Inefficient Contracts
Step-level production functions are effective institutional means to prevent problems from nonratification that have their roots in free-riding. In the mean time, however, they may create
another cooperation trap: inefficient contracting.
When governments consider the viability of international agreements, they do not only take
account of future benefits from policies and the costs for implementation. Political actors also
worry about their reputation. Since international cooperation consists of two steps, contracting
and ratification, actors are concerned about their reputation in both moments. Governments
may gain in status from their mere decision to sign an agreement. Then again, ratification
failure may impose substantial reputation costs.
Rational actors who devise their strategy for international cooperation endogenise the ratification stage and take the decision to actually sign an agreement against the backdrop of costs
and benefits at both stages at a time. Governments first chose whether to contract and second whether to ratify. Depending on their choice, three scenarios for international cooperation
arise.1
1
A formal model in the appendix illustrates the following argument, its assumptions, conditions and comparative statics in more rigorous terms.
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 7
Table 1: Systematic summary of theoretical expectations. Players’ strategies at each stage for
different utilities from policies and different relationships between reputation from contracting and ratification.
Policy
Benefit
Stage
Small Rep. Gain from Signature & Large Rep. Loss from
Non-ratification
Large Rep. Gain from Signature & Small Rep. Loss from
Non-ratification
Beneficial
Contracting
Ratification
(’Coop.’)
(’Coop.’)
(’Coop.’)
(’Coop.’)
Costly
Contracting
Ratification
(’Def.’)
–
(’Coop.’)
(’Def.’)
When international agreements are beneficial, all sides will sign and readily put its terms into
practice. As shown above, free-riding is not an issue–contracts become legally binding only once
all states have ratified. Reputation loss from non-ratification is not relevant either, because
the signatory parties are eager to incorporate the agreement into domestic law for its positive
effects. In contrast, governments refuse their signature, if they expect an agreement to be more
costly than beneficial. If policies promise neither reputation gains from approval nor desirable
policy effects, governments prefer to abstain from international cooperation and rather regulate
policies unilaterally. Finally, signing first and then neglecting ratification can be rational, too.
Governments consider it to be a viable strategy under two conditions: Accepting an agreement
offers reputation gains which outweighs its expected loss from ratification. And the expected
reputation loss from defection needs to be less costly than the ratification of agreements. Under
such circumstances, governments easily agree, because they still can de-facto veto policies in the
ratification stage. Remember that international agreements only become valid once all signatory
states put its terms into practice. Governments find it rational to sign inefficient international
agreements.
Table 1 summarises the expected behaviour for all three scenarios. It displays the preferred
strategies depending on the utility of the public good and the relationship between reputation
from contracting and ratification. Governments who strongly benefit from international cooperation remain unaffected by considerations about reputation. They have high expectations about
the realisation of a policy and will play cooperative strategies in both stages.Things change when
the public good is costly. Now, reputation plays a crucial role. As long as a signature alone does
not offer substantial benefits, actors will be reluctant to contract on policies which they do not
enjoy after all. In contrast, when contracting can substantially increase reputation, governments
may be tempted to sign. They first adopt a regulation and then veto its ratification. In sum,
international cooperation in line with these rules should lead to two different behaviours: On the
one hand, governments adopt policies and easily ratify them. On the other hand, governments
agree on policies which remain unconsidered, inflating the overall output of agreements.
8 | WP-2013 CHRISTIAN ARNOLD
3 International Cooperation and Inefficient Contracting in
Mercosur
When the governments of Argentina, Brazil, Paraguay and Uruguay established Mercosur and
its current institutional design with the Protocol of Ouro Preto (POP) in 1994, they agreed
that only the last member enacting a regulation domestically would trigger its overall juridical
validity. Mercosur’s ratification record therefore allows to observe the effect of ratification rules
which produce public goods with a step level production function.
In fact, cooperation behaves in line with theoretical expectations. First of all, Mercosur faces
fierce ratification problems: Members incorporate only about two thirds of all regulations into
the domestic juridical systems. The reason for this dismal record are not attempts to free-ride.
Policies which typically invite to benefit from others’ efforts are no obstacle to regional cooperation in the South American case. Non-ratification rather occurs for matters of inefficient
contracting. I exemplify the effect from the benefits of signalling with two mechanisms. Governments may want to communicate their sustained interest in regional cooperation to their
international partners despite isolated conflicts among them. Moreover, governments seek to
present themselves as cosmopolitan statesmen to their constituency. In both cases, delegations
easily adopt regulations and fail to ratify them later.
3.1 Mercosur and the Rules for Ratification
Mercosur’s member states unanimously take decisions in one of the three decision bodies, the
Common Market Council (CMC), the Common Market Group (CMG) or the Trade Commission
(TC) (Bouzas and Soltz 2001; Lavopa 2003; Ventura and Perotti 2004). Each country ratifies
common regulations and communicates the success to the Mercosur Secretariat. These rules
intend to assure that all policies enter into force in all countries at the same time: According to
Article 42 POP, a regulation is legally binding only once the Secretariat has received notice of
the last members’ ratification. The Secretariat then notifies all members about the imminent
validity and the agreement finally takes effect in all Mercosur countries 30 days after this notice.2
Mercosur is an intriguing case to observe the dynamics of the theoretical model in practice. Apart
from the unique rules for ratification, the reputation costs from non-ratification are particularly
low: Governments have little fear to lose reputation, because information about the status quo
of ratification is not publicly available. While Mercosur’s Secretariat collects information on
successfully incorporated cases, access to this data base remains restricted. The Secretariat
provides information only for individual regulations, making it hard for private actors to hold
their governments accountable.3 Mercosur’s procedures are similar with regard to information
vis-à-vis partner governments. While meetings and minutes exist which intend to brief about
ratification endeavours in particular policy fields, the overall ratification record remains officially
2
Mercosur’s members agreed on these rules in the Protocol of Ouro Preto in 1994. Alejandro Pastori, who
was the legal advisor of the Uruguayan Foreign Minister during these negotiations, compared this procedure to a
swimming pool. All swimmers would step close to edge. Only if everyone was ready, all would jump at the same
time. (Interview in Montevideo, April 2009)
3
The Secretariat’s website allows for querying the status quo of single regulations, only.
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under disclosure (Caetano et al. 2003).
Typically, effective dispute settlement mechanisms rely on explicit sanctions to overcome cooperation problems (Downs et al. 1996; Fearon 1998; Yarbrough and Yarbrough 1997). Mercosur’s
institutional provisions remain comparably limited with this respect and largely intergovernmental in character (Lenz 2012; Malamud 2005b; Pena and Rozemberg 2005). According to
the categorisation for dispute settlement in international trade from Yarbrough and Yarbrough
(1997), Mercosur’s dispute settlement system would file into the second weakest category. In
the terms of Keohane et al. (2000), Mercosur’s dispute resolution displays a moderate level
of legalization (Krapohl et al. 2009). Despite Mercosur’s institutions for conflict adjudication,
their independence, access and legal embeddedness cannot provide for effective enforcement of
Mercosur’s regulations.
3.2 Expected Ratification Behaviour
Given Mercosur’s institutions, which behaviour would one expect from goal driven utility maximisers? At a fundamental level, ratification occurs according to the overall net-benefit from a
policy. The more rewarding a regulation, the more likely are high probabilities for ratification
at early stages. Conversely, if the ratification of a policy is considered to be less advantageous,
actors care comparably less about it. The probability for ratification will be high at later points,
or put differently, the whole process takes longer. Three factors influence the overall benefit from
a regulation: the utility from the jointly produced public good, reputation from contracting and
reputation loss from not ratifying.
Mercosur’s ratification rules allocate public goods without motivating free riding. Policies with
externalities typically causing such collective action problems should not do so in the South
American case: When countries establish a common external tariff under ratification rules that
allow for free riding, unilateral defection is beneficial. The lowest effective tariff diverts trade
in favour of those who charge less. Governments therefore benefit if they ratify later than their
partners. In contrast, in Mercosur these incentives do not exist. Given that tariffs become
legally effective once the last member ratifies them, no motivation to undermine common external tariffs arises. The joint implementation of policies leads to highly beneficial public goods
and ratification should be particularly swift. Ceteris paribus, regulations regarding the common
external tariff should not take more time for ratification than other policies.
While Mercosur’s ratification rules successfully solve free-riding, they expose yet another collective action problem. If the signature of an agreement offers tangible benefits and the implementation of a particular regulation is costly and, governments are tempted to agree to inefficient
contracts. Against the backdrop of Mercosur’s constantly low costs from non-ratification, how
to distinguish policies that produce highly rewarding public goods from those which do not?
And what drives the reputation from signing an agreement?
Mercosur’s members regularly adopt particularly rewarding policies. While one of the region’s
main goals has been the establishment of a common external tariff, its members have always
been willing to mutually concede exceptions for certain countries on certain products during dire
economic or political times. Such temporary tariff reductions on single items for a particular
10 | WP-2013 CHRISTIAN ARNOLD
country allow the import of these goods at lower cost. Since only the affected country needs to
ratify these regulations, the implementation of these policies is highly rewarding.
In contrast, policies on government cooperation are mutual understandings on further cooperation between the members. Any benefit from the public goods do not arise now, but only at
some distant point in the future. Unlike easily implementable tariff reductions, these policies
require comprehensive and therefore costly adaptions in the administration and its regulatory
routines. Those who ratify such regulations discount these costs from the overall benefits of
regulations. On average, the implementation of policies on government cooperation should be
comparably less rewarding than other policies with higher and more tangible benefits.
Two mechanisms exemplify how delegations can benefit from the mere agreement to coordinate policies at the Mercosur level. In the first case, government use their signature to signal
other Mercosur members their interest in sustained cooperation. Mercosur’s governments are
bound by their respective domestic constituency and conflicts may arise between member states
over single salient issues. During such times, agreements over further regional cooperation in
other policy areas can become an important signal. Governments want to reassure international
partners about their good intentions despite the ongoing difference over single issues. Policies
on governmental cooperation are particularly useful, because they unequivocally flag sustained
interest in regional cooperation.4
Analysing media coverage of Mercosur’s trade disputes, Gomez-Mera (2009) devises an annual
score which is capable of capturing the perceived level of large salient conflicts between Mercosur’s governments. In times of high levels of conflict, signals are particularly necessary to
communicate a sustained interest in regional cooperation. This puts contracting in Mercosur at
centre stage, since it is capable of reassuring the partners of a long term interest in cooperation
despite few, but salient conflicts. High levels on the perceived index for conflict lead to inefficient
contracting of agreements on the future coordination of governmental cooperation.
In the second case, domestically accountable politicians benefit from signing a Mercosur regulation because they can engage in window dressing. In Mercosur, only the Common Market
Council, being the highest of its three decision bodies, consists of electorally accountable decision makers. When their domestic constituency supports regional cooperation, these politicians
benefit from signing contracts in Mercosur. They can use press coverage to present themselves as
proactive and statesmanlike leaders - a behaviour often observed with Latin American leaders
at regional summits (Dabene 2009; Whitehead and Barahona de Brito 2005). Knowing that
they can easily prevent the ratification of costly policies, politicians contract for the pure sake
of signalling.
The benefit these politician receive from contracting varies with the popular support for regional cooperation. I measure Mercosur’s popularity with the Latinobarómetro, a survey among
Latin America’s population capturing political attitudes on a yearly basis. When citizens favour
4
The most prominent example with this regard is the economic crisis in Brazil and Argentina which spurred
a number of trade disputes between 1999 and 2002. While the crises ended what was perceived as Mercosur’s
“golden age”, the member governments answered with a campaign to relaunch the regional integration project.
While on the one hand Mercosur’s members had fierce disputes over the trade of chicken, car tires and others,
governments made it very clear that their true intentions were continuous and sustained cooperation (Bouzas
2003; Malamud 2005a).
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 11
cooperation with the regional partners, politicians should be particularly susceptible to such
incentives. Then again, when this support is lower, politicians have lower gains from signing the
agreements. We should await that, ceteris paribus, higher levels of popular support for regional
cooperation makes politicians more likely to contract inefficiently. Bureaucrats, in contrast,
should be immune to such incentives. The attitude of citizens have neither an effect on the way
they adopt international contracts nor on the way how they are subsequently ratified. Unlike
policies regulating the cooperation of governments, exceptions from the common external tariff
should be a different case. Given that these policies produce highly rewarding public goods,
eventual incentives from public support do not lead to cooperation problems, be they adopted
by politicians or bureaucrats.
3.3 Data and Methods
Even though Mercosur’s secretariat keeps track of the complete ratification progress, public access to this data is restricted. Officials are reluctant to share their knowledge with citizens or
scholars. Only a limited number of authors report descriptive statistics (Caetano et al. 2003;
?; Perotti et al. 2004; Rivas 2006). The current empirical analysis is grounded on three different, but overlapping subsamples of the data base. Cross-validation between the three sources
and with the above mentioned articles identifies them as the official data base from Mercosur’s
Secretariat. Together, the three samples constitute the complete ratification record of all 1033
regulations adopted between 1994 and 2008 that required ratification.
A quick look at the data reveals that Mercosur in fact has a substantial ratification problem.
Figure 1 provides insight into the dimension of the issue. The horizontal axis charts ratification
over the course of the years. The vertical axis shows the fraction of successfully ratified regulations in relation to the total number of regulations. The graphs for the four countries indicate
the development between 1994 and 2008. Figures show that Mercosur’s members did not ratify
all of the 1033 regulations they should have. Apparently, incorporation initially plummeted in
1996, but has increased ever since and reaches a level between 63.0% in Uruguay and 75.7% in
Brazil in 2008. Since 1997, while Brazil seems to perform best, Uruguay is worst and Argentina
and Paraguay are usually in between this corridor. The dimension of non-ratification over the
course of so many years is puzzling. Why do the South American countries not keep their
promises they make at the negotiation table? And why do they continue to contract in the light
of this defective behaviour?
Survival models are capable of considering both the success and the duration for ratification
(Box-Steffensmeier and Jones 1997; Johnson and Albert 1999). The unit of analysis–here the
ratification of a Mercosur regulation in one country–enters the observation period as non-ratified
and alters this discrete state after a certain amount of time. Depending on a regulations’ characteristic, member governments may have higher probabilities to incorporate the policy into
practice already during the first days after the adoption at the Mercosur level. In consequence,
overall ratification is likely to be swift. Other regulations have a very low probability in the
beginning and display higher probabilities only after a large number of days. Here, ratification
is likely to succeed after a considerable amount of time.
Successfully Ratified Policies
12 | WP-2013 CHRISTIAN ARNOLD
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Argentina
Brazil
Paraguay
Uruguay
0%
1994
1996
1998
2000
2002
2004
2006
2008
Year
Figure 1: Ratification record of Mercosur’s member states over the course of the years.
To control for further systematic influences on ratification with multivariate analysis, I measure
a number of variables which capture characteristics of the political context and the regulations
themselves. First, I divide Mercosur’s policies in a series of categories (table 2). Among all 3560
necessary ratification processes, politicians adopted 599 of them in the Common Market Council
and bureaucrats 2961 in the Common Market Group and the Trade Commission. I furthermore
distinguish between six policy types. 725 regulations relate to the common external tariff, 800
announce governmental cooperation. In 104 cases, the regulations consider the regulation of
Mercosur itself. 87 policies address the internal market, 276 policies define exceptions from the
common external tariff and 1537 concern technical regulations. 31 regulations could not be
attributed. Finally, not all countries need to ratify all policies. Argentina has to incorporate
870 Mercosur rules into domestic law, Brazil 882 policies, Paraguay 929 policies and Uruguay
879 policies.
In addition to these categories, four further variables will serve to control for the political context.
Public support for Mercosur measures citizens’ attitude with regard to regional cooperation on
a yearly basis.
5 6
Survey data from the Latinobarómetro shows that the population takes on average a comparably
positive stance towards regional cooperation (table 3). Support for Mercosur ranks at 82% with
5
Since there is no question concerning Mercosur which has been asked every year, three different question
wordings are used. Despite their difference, all of them address a general consent towards Mercosur. The question
which has been asked most frequently is: “Are you in favour or against economic integration in Latin America?”.
Respondents can answer the question with very much in favour, a little in favour, a little against and very much
against. I coded the two positive categories as consent and the two negative ones as dissent. In the year 2003,
respondents were asked “Among the institutions that are on the list, please evaluate them in general terms and
give them a mark between 0 and 10, where 0 is very bad and 10 would be very good, or else tell me whether you
have not heard enough to provide an opinion about: Mercosur”. I rescaled the answers to differentiate between
those who reject Mercosur and those who do not and coded all responses larger and equal to 5 as positive and
those that are smaller than 5 as negative. Finally, in the years 2004, 2006 and 2007, the question was “Treaties
on international free trade have a very positive, positive, negative, very negative or no impact at all on your
employment opportunities?”. Again, I merge the two top categories and the two lower ones.
6
I calculate support for regional cooperation for each country and year. Missing values are imputed with the
Amelia II package (King 2010).
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 13
Table 2: Descriptive statistics for three categorial variables.
n
Decision Bodies
CMC
CMG and TC
599
2961
Policies
Common External Tariff
Governmental Cooperation
Mercosur Interna
Internal Market
Tariff Exception
Technical Regulations
Others
725
800
104
87
276
1537
31
Countries
Argentina
Brazil
Paraguay
Uruguay
870
882
929
879
a standard deviation of 0.06 across all regulations. To capture the number of domestic actors
which have to be coordinated for ratification, I introduce the number of veto players of the
respective domestic political system and operationalise this number with the index from Beck
et al. (2001). For the sample, it takes a mean of 3.83 and varies with a standard deviation of
1.22. Regional trade openness measures the relative trade openness towards Mercosur partners
and captures information about the trade dependency of a country with regard to the region.
It is calculated as the sum of imports and exports to the other Mercosur countries and divides
this figure with the sum of absolute imports and exports of a country. Here, it has a mean of
34% and a standard deviation of 0.15. Finally, I control for the country where the respective
decision was adopted.
I further introduce four variables capturing attributes of Mercosur’s policies. I approximate the
complexity of a regulation with its length and count the number of words and the number of
paragraphs.7 Decomposing the variance of regulations’ measures for length into the principal
component allows to retrieve the latent complexity. Assigning principle component scores to
each regulation, complexity can be interpreted on a common scale (Bartholomew et al. 2008;
Joliffe 2002). The mean in the pooled sample is at 0.29 and has a standard deviation of 1.30.
Next, a dummy variable captures whether a policy contains an annex with comprehensive technical details. The value takes a mean of 0.66 and has a standard deviation of 0.47. The number
of references to already existing Mercosur rules approximates the amount of already existing
7
I use the software JFreq to count the number of words and rely on handcoding for the number of paragraphs.
Both values are log transformed to account for their skewed distributions.
14 | WP-2013 CHRISTIAN ARNOLD
Table 3: Descriptive statistics for variables measuring the political context and attributes of the
regulations.
Political Context
Mercosur Support
Veto Players
Conflict Level (sqrt)
Regional Trade Openness
Meeting in the Own Country
Policies
Complexity of Policy
Annex
References in Preamble (sqrt)
Overrules Existing Policy
Mean
s.d.
Min
Max
0.82
3.83
1.69
0.34
0.24
0.06
1.22
1.29
0.15
0.43
0.63
2
0.00
0.08
0
0.94
6
4.30
0.55
1
0.29
0.66
1.83
0.14
1.30
0.47
0.52
0.35
-2.41
0
0.00
0
4.23
1
3.87
1
domestic Mercosur legislation a policy builds upon. Taking the square root to correct for the
skew of the variable’s distribution, I report an average of 1.83 and a standard deviation of 0.52.
Finally, another dummy will be used to indicate whether a policy overrules already existing
legislation. This variable has a mean of 0.14 and a standard deviation of 0.35.
3.4 Inefficient Contracts in Mercosur
Table 4 presents the results from three multivariate survival models. As will be discussed further below in more detail, free-riding does not occur in Mercosur. Delegations do make empty
promises, both, in the case of communicating willingness for sustained cooperation and as part
of window dressing. The two left columns report point estimates and corresponding standard errors from the model on the complete pooled data set (n = 3560). The other columns summarise
estimation results from two subsets of the data. The two central columns contain estimates from
a model on governmental cooperation (n = 800). The two columns to the right use information
on policies regarding exceptions from the common external tariff (n = 276).
The variables of theoretical interest in the first two lines of table 4 report effects in line with
theoretical expectations.
The level of conflict has a delaying effect which is statistically dif-
ferent from 0 only in the sample on governmental cooperation. The interactions between the
different policy types in the complete sample reported on the left yield the same conclusion.
Only the interaction between the level of conflict and the policies on governmental cooperation
is statistically different from 0 and the coefficient awaits more time until successful ratification
the higher the conflict between governments during contracting.
In the complete sample and the subsample related to policies on governmental cooperation, the
negative estimate of the Common Market Council indicates less time for ratification for policies
which are adopted in this decision body. But public support–which taken alone seems not to
matter–attenuates the effect from the decision bodies. The higher the share of citizens support-
Log likelihood
N
(Intercept)
Conflict level
Mercosur support
CMC
TC
Argentina
Brazil
Paraguaz
Veto Player
Trade Openness
Meeting in own country
Complexity
Annex
References in preamble (sqrt)
Overruling existing policies
Policy on
Governmental cooperation
Mercosur interna
Internal market
Tariff exception
Technical regulations
Others
CMC X MCS support
TC X MCS support
Conflict level X Governmental cooperation
Conflict level X Mercosur interna
Conflict level X Internal market
Conflict level X Tariff exception
Conflict level X Technical regulations
Conflict level X Others
Log(scale)
(0.12)
(0.27)
(0.22)
(0.16)
(0.10)
(0.60)
(0.01)
(0.01)
(0.02)
(0.03)
(0.06)
(0.03)
(0.01)
(0.15)
(0.02)
1.14
0.24
1.22
-0.14
1.41
2.05
0.03
-0.04
0.04
0.05
-0.07
-0.06
0.01
-0.03
0.25
-19959.8
3560
(0.55)
(0.01)
(0.01)
(0.92)
(1.21)
(0.13)
(0.24)
(0.10)
(0.03)
(0.77)
(0.06)
(0.02)
(0.06)
(0.06)
(0.08)
6.29
-0.00
0.01
-1.61
4.05
-0.31
-0.88
-0.12
0.05
-0.80
-0.19
0.05
-0.16
-0.17
0.28
Complete Sample
(0.02)
(0.04)
0.08
0.25
-3912.4
800
(0.04)
(0.29)
(0.56)
(0.24)
(0.06)
(1.79)
(0.14)
(0.06)
(0.16)
(0.13)
(0.18)
-0.47
-0.64
0.06
0.07
-1.46
0.04
-0.14
0.54
0.30
0.08
0.25
(1.21)
(0.01)
(0.01)
(1.94)
5.50
0.03
0.02
-5.32
Govt. Cooperation
(Subsample)
(0.06)
(0.04)
(0.06)
(0.74)
(1.49)
(0.68)
(0.14)
(4.68)
(0.31)
(0.19)
(0.53)
(0.28)
(0.54)
(3.56)
(0.03)
(0.04)
(3.67)
-1039.1
276
0.46
-0.05
0.46
-2.21
-6.23
2.00
0.18
-16.19
-0.34
0.99
-1.34
-0.81
-1.01
11.13
-0.02
0.05
3.99
Tariff Exceptions
(Subsample)
Table 4: Estimation results from survival models (Weibull Distribution). Reference categories for the dummy variables are as follows: countries:
Uruguay; decision bodies: all policies not adopted by the Common Market Council; policy types: all related to the common external
tariff.
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 15
16 | WP-2013 CHRISTIAN ARNOLD
ing the regional integration project, the less relevant the initial advantage of regulations adopted
in the Common Market Council and the quicker ratification of policies the bureaucrats decide.
Both the estimate for the Common Market Council and the interaction effect report standard
errors small enough to be certain about effects different from 0. Interestingly, the situation is
different for those policies which concern exceptions from the common external tariff. Here, the
uncertainty about the estimates is so large that the true effect cannot be told to be different
from 0.
All three models contain a number of control variables. Fixed effects for countries contrast
between Mercosur’s members and refer to Uruguay as a baseline category. In comparison to
Uruguay, Brazil ratifies most swiftly and is followed by Argentina in all three samples. Paraguay
ratifies slower in both subsamples, but swifter in the complete sample.
Next, three variables control for the political context of decision making. The number of veto
players increases the time necessary for ratification. The uncertainty is however too large to
report a high probability that the effect is not zero. Trade openness with respect to regional
partners speeds up ratification in all samples. The size of this effect is particularly remarkable
for polices which implement exceptions from the common external tariff, the only sample where
the effect can be distinguished from 0 on statistical grounds. When the meeting takes place in
the own country, the host ratifies this regulation with less time in the overall sample. This effect
cannot be distinguished from zero in two subsamples on statistically reliable grounds.
Next, four further control variables capture characteristics from the regulations. The complexity
of regulations increases ratification duration in the first and the second model, but decreases it
in the last case. The existence of an annex decreases the ratification duration in the complete
sample and the subsample on the tariff exceptions, but prolongs it in governmental cooperation. In a similar vein, the number of references in the preamble correlate with less time for
ratification in the first two samples and with more time for ratification in the last case. All
results mentioned in this category offer evidence to believe in effects different from 0. The last
variable, a dummy capturing those regulations which explicitly alter existing variables, reports
statistically significant results only for the complete sample, where they lead to more ratification
time.
Finally, the model on the complete sample contains a series of fixed effects which distinguish between different types of policy. All estimates summarise the difference to the baseline category,
which are regulations concerning the common external tariff. Only exceptions from the common
external tariff take less time for incorporation. All other categories require more time. With the
exception of policies regulating Mercosur itself and exceptions from the common external tariff,
all such fixed effects report standard errors small enough to refute the null-hypothesis.
What do these statistical results tell with regard to the theoretical expectations? I first consider the effect of institutions on free riding. Under normal ratification rules, we await that
all policies regarding the common external tariff are particular susceptible to long ratification
durations. In contrast, the ratification rules implemented in Mercosur prevent such behaviour.
Figure 2 visually summarises statistical results from model 1 in table 4. The figure displays the
expected ratification duration for each of the different policy types based on simulations from
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 17
●
Exceptions CET
●
Common External Tariff
●
Mercosur Interna
●
Internal Market
●
Governmental Cooperation
●
Technical Regulations
0
500
1000
1500
2000
2500
Expected Ratification Time (in Days)
Figure 2: Expected ratification duration for different policy types. All other covariates held at
their mean. To identify the theoretically interesting category Common External Tariff,
its value is painted in blue.
the estimated model equation, holding other covariates at their mean. These calculations allow
to understand the effect from the manipulation of one variable under the control of all other
factors. The difference in the expected ratification duration is a result from different policy
types while controlling for all other influences (King et al. 2000).
The simulations indicate the mean expected ratification duration with a circle and the 95%
uncertainty with horizontal bars. Results offer strong evidence for the theoretical claims. Governments are expected to take 658 days for ratification on average. Only exceptions from the
common external tariff will be ratified more swiftly (521 days) - all other policy types take
considerably more time. Incentives for free riding clearly do not seem to cause Mercosur’s ratification issues. If unilateral defection from agreements on common external tariff were the cause
of the dismal ratification behaviour, we would observe much longer ratification durations for
policies on the common external tariff. Contrast these results with ratification durations for
general statements about governmental cooperation and technical regulations. Such policies are
typically the result from coordination on one among many viable bargaining solutions. Literature expects that once actors managed to coordinate on a contract, the subsequent legal and
bureaucratic implementation does not cause any substantial problems. After all, behaviour in
line with the agreement is always beneficial. In Mercosur, the situation is a little different. Controlling for political context and idiosyncrasies from the regulations themselves, agreements on
governmental cooperation and technical regulations require more ratification time than policies
on the common external tariff. In sum, the rules for ratification dramatically change the underlying strategic logic of international cooperation. Free riding is no longer the main concern for
international cooperation.
While Mercosur’s institutions solve free-riding, they offer incentives for inefficient contracts.
Figure 3 charts results from simulations that help understand the effects from signalling to international partners. Controlling for all other effects, I calculate the expected difference in the
18 | WP-2013 CHRISTIAN ARNOLD
Expected Duration Difference (days)
10000
7500
5000
2500
0
0
5
10
15
20
Level of Conflict (Gomez Mera 2009)
Figure 3: Difference in expected ratification duration between regulations on governmental cooperation and all other policies at increasing levels of perceived conflict between the
governments. The shaded area represents the 95% confidence level. The white line
the expected mean duration difference.
time ratification takes between policies on governmental cooperation and all other policies. The
simulation is repeated at increasing levels of conflict to understand its effect on the expected
duration difference. The shaded line displays the 95% confidence intervals around the estimation, the white line the average expected difference in the time necessary for ratification.
At a fundamental level, the ratification of policies that concern governmental cooperation always
take more time than all others. Given that the implementation of such policies entails costly
domestic adaption and promises little immediate returns, this substantial difference comes to
no surprise. More importantly, increasing the levels of conflict leads to more time necessary for
ratification. The mechanism behind this behaviour is inefficient contracting: the higher the level
of conflict, the more likely it is that governments agree on further policy coordination.8 But
governments do not adopt these policies to actually put them into practice. Once the regulations
have served as signalling devices, ratification does not follow. The second mechanism considers how politicians adopt inefficient contracts to send signals to their domestic constituency.
When the electorate supports regional cooperation, politicians are eager to present themselves
as proactive regional actors that promote a regional policy agenda. When these policies require
costly policy adaption, Mercosur’s popularity leads to empty promises.
I again simulate expected differences in ratification time on the basis of the estimated statistical
model. I contrast the regulations that politicians adopt in the Common Market Council with
those policies that bureaucrats decide in the Common Market Group and the Trade Commission. To understand the effect from the popular support for regional cooperation, I calculate
8
Supplementary analysis of Mercosur’s decision making shows that controlling for all other factors, the higher
the level of conflict, the higher the probability that the delegations adopt a policy on governmental cooperation.
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 19
12000
Expected Duration Difference (days)
Expected Duration Difference (days)
12000
8000
4000
0
−4000
8000
4000
0
−4000
70
75
80
85
90
Mercosur's Popular Support (%)
(a) Exceptions from the common external tariff
70
75
80
85
90
Mercosur's Popular Support (%)
(b) Governmental cooperation
Figure 4: Difference in expected ratification duration between regulations adopted by democratically accountable politicians in the Common Market Council, and bureaucrats in the
Common Market Group and Trade Commission at increasing levels of popular support
for regional cooperation. The shaded area represents 95% uncertainty. The white line
the expected mean duration difference.
the expected ratification time at increasing levels of Mercosur support among the population.9
Figure 4(a) displays expected differences in ratification time for the exceptions from the common external tariff based on table 4. There is no systematic difference in ratification duration
between regulations politicians adopt from those decisions bureaucrats take. More importantly,
the uncertainty around the estimate for politicians shows that increasing levels of Mercosur popularity make no difference for the duration of subsequent ratification. Controlling for all other
variables, the uncertainty around the estimates can never be told to be different from 0.
This behaviour is in line with the theoretical expectations: Exceptions from the common external tariff are beneficial policies. Actors are always eager to contract and then ratify such
regulations. Whether such signing offers additional incentives or not does not have an effect on
the propensity to put a policy into practice.
In contrast, ratification behaviour is different when the implementation of a regulation would
not yield high utilities. Then actors are inclined to contract now and delay or even veto the
effectiveness of a regulation later. To visualise the effect from the interaction effect, I again
simulate first differences. Holding all other covariates at their mean, I simulate the effect from
increasing levels of Mercosur support for regulations adopted in the Common Market Council
in contrast to the Common Market Group and the Trade Commission.
In contrast to exceptions from the common external tariff, the interaction takes a clearly distinct effect now. At low levels of public support, policies adopted from politicians take the same
amount of time for ratification than those adopted by the bureaucracy. The more popular the
9
The change from 70% to 90% represents a variation between the 5% quantile and the 95% quantile.
20 | WP-2013 CHRISTIAN ARNOLD
regional cooperation project, however, the more prominent the difference in the time necessary
to enact a policy domestically.
Politicians are easily tempted to contract for matters of a positive and proactive image in the
press. When public support for the regional integration project is high, prospects from contracting may outweigh consequences from non-ratification. Since reputation costs are comparably low
in the Southern Common Market, politicians are prone to adopt policies that offer little advantage or even detrimental ones when complied with. Knowing that they can easily prevent overall
effectiveness with a veto during ratification, they can realise reputation gains during contracting
without fear. While this effect is clearly apparent in the complete sample, it is particularly
pronounced for regulations on governmental cooperation. These policies serve politicians particularly well to create a positive image as proactive, regional leaders. They stress governments’
intention to cooperate in the future, but do not necessarily require them to make substantial
concessions now.
4 Conclusion
This paper shows that cooperation problems which arise from incentives for free riding are not
necessarily as intractable as the literature in international relations suggests. So far, implicit
and explicit means of retaliation are believed to be the only institutional means to solve such
cooperation issues. I argue that rules for ratification may do so just the like. They fundamentally
alter how partners produce collective goods, change the strategic character of interaction and
cause cooperation problems which are fundamentally different in character. When the last
country determines the overall effectiveness of a policy, incentives for individual defection do
not arise. But altering ratification rules does not solve all cooperation issues. If incentives for
contracting are high and costs from non-ratification low, actors may adopt policies which provide
little benefit from collective action. Under these conditions, inefficient contracting may lead to
inflationary many international rules which are signed, but not ratified.
I offer empirical evidence for these theoretical considerations. The Southern Common Market,
a regional cooperation scheme between Argentina, Brazil, Paraguay and Uruguay, adopted 1033
regulations at the regional level between 1994 and 2008. Mercosur is particularly suitable to
illustrate these theoretical considerations. It uses the above mentioned rules for ratification and
policies become effective only once the last country incorporates a regulation into domestic law.
Moreover, reputation costs are particularly low due to the general institutional provisions. I
collected and analysed the complete ratification record of all policies and find proof for these
theoretical claims. First, rules on the common external tariff typically offer individual incentives
for defection. In contrast, Mercosur’s governments are eagerly ratifying these policies. Second,
against the backdrop of low costs for non ratification, incentives from contracting allures actors
to contract and then refrain from ratification when the benefits from collective goods is low. In
addition, politicians seek to use the high popularity of Mercosur for the creation of a positive
image among the electorate. There is a substantial reward from signing an agreement, member
state delegations easily adopt policies, but refrain from ratification if the implementation is
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 21
Figure 5: Two player two-step game of international cooperation. Here an agreement only enters
into force if both countries ratify it on the second stage. Rj : reputation gains from
contracting of player j = A, B; −rj : reputation costs of non ratification; Xj : expected
utility from ratification stage; Uj : Utility from policy change ratified by both players.
D
0, 0
RA , −RB
D
C
C
−RA , RB
XA + RA , XB + RB
D
C
Stage 1: Contracting
D
−ra , −rB
0, −rB
C
−rA , 0
UA , UB
Stage 2: Ratification
expected to be costly.
This paper makes an important contribution to understanding how international institutions
produce outcomes in international cooperation (Jacobson 2000; Simmons 2000; Simmons and
Danner 2010; Von Stein 2005). The ratification rules the Southern Common Market uses inhibit
free riding. Actors incorporate regulations beneficial to all without regress. But the institutional
design encourages inefficient contracting, since actors may adopt policies which provide benefits
from contracting only.
A Formal Model10
The model reflects classical game theoretic approaches used for the representation of international cooperation (e.g. Snidal 1985; Stein 1982). Two players A and B interact with one another
in two stages. In the first round, they coordinate on a common policy which they promise to
ratify later. They take their decision in the awareness of reputation gains from signalling cooperation Rj with j = A, B and the anticipated overall benefit from future ratification Xj . Those
who cooperate in this first round can claim the benefit Rj , those who defect lose −Rj . No harm
is done when neither of the partner engages in action.
In the second round, both actors may chose to keep their promise from the negotiation table or
rather defect from their commitment. Here, they take their decision in the light of reputation
costs −rj which arise from defection, the benefit from putting the agreement into practice Uj
and the costs from adapting the own behaviour cj . Governments who chose not to ratify an already agreed policy are punished with the reputation costs −rj . Whoever choses to comply with
the terms of an agreement and incorporate the rules into the domestic legal framework faces
adaption costs. Cooperation thus subtracts −cj from utility. Finally, whenever both players
chose to ratify the agreement, joint efforts produce the utility Uj . The production function of
the public good determines the overall share of the public good when one of the players defects.
While a linear production function would give rise to at least the partial provision of the public
good, the step-level function inhibits it. Cooperation is beneficial only if all actors adhere to
the common course. Figure 5 summarises the pay-offs from both stages of the game. Player
A’s pay-offs are on the vertical axis, player B choses on the horizontal axis. In addition to this
10
I am indebted to Ina Drepper for her help with the formulation of the model
22 | WP-2013 CHRISTIAN ARNOLD
fundamental structure, a number of further assumptions conclude the description of the game.
Actors may evaluate the utility of the common policy differently. Those who have to ratify an
international regulation either cherish the policy (Uj = H) or they rather disapprove a change
in the status quo (Uj = L). At the outset, nature draws the utilities Uj independently from
a distribution with P (Uj = H) = p and P (Uj = L) = 1 − p, p ∈ [0, 1]. Players know the
distribution from which the types Uj are drawn. The realisation Uj is private information to
player j and becomes public only on the ratification stage. Moreover, the following restrictions
on the parameters apply.
Rj , rj , ρ, H, c > 0
(1)
−rj > L − cj
(2)
with ρ being the discount factor for the utility for the production of the collective good in the
second round, ranging between 0 ≤ ρ ≤ 1. Assumption (2) formalises the statement that a
country of type L will be more strongly harmed by ratifying than from the reputation loss −rj
it would suffer from defecting on the second stage. To understand the dynamic of the game,
I first consider equilibria at the ratification stage. Under assumptions (1) and (2), different
combinations of types H and L lead to different Nash equilibria and the following three scenarios.
If both players are of type H and attribute the production of the public good high value, playing
the cooperative strategy strictly dominates defection. Irrespective of the partners’ strategy, a
players’ best response is always cooperation. The situation changes, when one of the players
is of type H and the other one of type L. While the player H who cherishes cooperation still
ratifies the international agreement, the best response of L is to defect (assumption 2). Mixing
the player types leads to equilibria where not all contracting partners fulfil their obligations and
hence the public good remains unprovided. Finally, if both countries are of type L, two equilibria
may arise. If A chooses to cooperate, the best response of B is to defect. The best response of
A to defection is to play cooperation due to assumption (2). The second equilibrium is given by
the reversed combination of strategies and I assume that the two countries will coordinate on
either one of the two equilibria with a probability of 0.5. Similar to the previous case, actors do
not produce the collective good.
When actors take their decision about international cooperation, they anticipate the second
stage. Signing the agreement would lead to the following expected utilities.
Xj =

 ρpH
if Uj = H
 −ρ 1 (1 + p)r
j
2
if Uj = L,
Figure 5 illustrates under which conditions actors are both eager to sign the contract. As long
as XA + RA > −RA and XB + RB > −RB , both players best response to (’cooperation’) is
to play (’cooperation’) themselves. Whether the property Xj + Rj > −Rj holds depends on
the expected utility from cooperation. Given the two possible states H and L, there are now
two different scenarios in the contracting stage. A country with Uj = H will always cooperate
since pρ(H − cj ) + Rj > −Rj and Rj > −ρcj are always true. In contrast, note that a country
NUFFIELD COLLEGE WORKING PAPERS SERIES IN POLITICS | 23
with Uj = L will only choose to agree on introducing the law if the public reputation loss
from defecting now is larger than the expected (internal) reputation loss from defecting on the
ratification stage:
1
− ρ(1 + p)rj + Rj > −Rj
2
1
ρ(1 + p)rj < 2Rj
|2 {z
}
Xj,L
⇔
1
1
ρ(1 + p)rj < Rj Xj,L (rj )
4
2
< Rj
(3)
with
∂Xj,L
1
= ρr > 0;
∂p
2
∂Xj,L
1
= (1 + p)rj > 0
∂ρ
2
Condition (3) reveals the potential inefficiency resulting from the ratification mechanism. If
(3) does not hold, a country of type L prefers to sign an agreement, because incentives from
cooperation today are so large that they outweigh the losses tomorrow. As long as rj is small and
Rj large enough, actors of type L may agree on policies with negative utility: They know that
they benefit immediately and in the meantime can prevent the policy at little costs tomorrow.
Three hypotheses follow from the comparative statics.
Hypothesis 2: All actors of type H are eager to contract in the first round and always ratify
policies in the second round.
Hypothesis 3a: All actors of type L do not cooperate on a policy shift in the first round as
long as 21 Xj,L (rj ) > Rj .
Hypothesis 3b: All actors of type L do cooperate on a policy shift in the first round as long
as
1
2 Xj,L (rj )
< Rj . In the subsequent second round a player of type L either defects himself
or leaves defection to the other player and cooperates. Either way, the agreement will not be
ratified.
24 | WP-2013 CHRISTIAN ARNOLD
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