Chad Rector

George Washington University

Federations and International Organizations

1.Puzzle

2.Cooperation and Commitment

3.Contrived Symmetry

4.Case study: Australia

1.Puzzle

1.Puzzle

• 1850s – independence

• 1860s – tacit cooperation

• 1880s – failed international organization

• 1890s – federal constitution (1901)

2. Cooperation and Commitment

2. Cooperation and Commitment

Payoff to A

Payoff to B

Payoff to A

Payoff to B

No cooperation

Cooperation

2. Cooperation and Commitment

Payoff to A

Payoff to B

No cooperation

Cooperation

2. Cooperation and Commitment

Payoff to A

Payoff to B

No cooperation

Bargaining space

2. Cooperation and Commitment

Payoff to A

Payoff to B

No cooperation

Negotiated outcome

2. Cooperation and Commitment

Payoff to A

Payoff to B

No cooperation

Limits of bargaining

2. Cooperation and Commitment

Payoff to A

Payoff to B

No cooperation

Negotiated outcome

2. Cooperation and Commitment

Relationship-specific asset: Investment whose return depends on the nature of a relationship

• Wal-Mart and contractors

• Taiwan and U.S. defense suppliers

• Adaptation to ally or market niche

2. Cooperation and Commitment

Payoff to A

Payoff to B

No cooperation

Negotiated outcome (Nash Bargaining Solution)

2. Cooperation and Commitment

Payoff to A

Payoff to B

Never start cooperation in the first place

Negotiated outcome

2. Cooperation and Commitment

Payoff to A

Payoff to B

Never start cooperation in the first place

Negotiated outcome

Cooperation starts, then ends

2. Cooperation and Commitment

Payoff to A

Payoff to B

Never start cooperation in the first place

Negotiated outcome

Cooperation starts, then ends

2. Cooperation and Commitment

Payoff to A

Payoff to B

Never start cooperation in the first place

Negotiated outcome

Cooperation starts, then ends

2. Cooperation and Commitment

3. Contrived Symmetry

Create exit costs

Payoff to A

Payoff to B

Never start cooperation in the first place

Negotiated outcome

Cooperation starts, then ends

3. Contrived Symmetry

Payoff to A

Payoff to B

Never start cooperation in the first place

Negotiated outcome

Cooperation starts, then ends

Cooperation starts, then ends, and institution costly to leave

3. Contrived Symmetry

Institutions that create exit costs

• Federal party systems

• Military / bureaucracy

• Identity

3. Contrived Symmetry

4. Australia

4. Australia

• 1850s – independence

• 1860s – tacit cooperation

• 1880s – failed international organization

• 1890s – federal constitution (1901)

4. Australia

New South Wales:

• Global trade, agriculture

• Free-trade coalition

Victoria:

• Regional trade, manufactures

• Protectionist coalition

4. Australia

New South Wales: Prefers IO

• Global trade, agriculture

• Free-trade coalition

Victoria: Prefers Federation

• Regional trade, manufactures

• Protectionist coalition

4. Australia

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

1867 1871 1875 1879 1883 1887 1891 1895 1899

Victoria

New South Wales

Average tariffs

4. Australia

Victoria

New South Wales

Regional trade / total trade

10%

15%

20%

25%

30%

35%

40%

45%

50%

1871 1875 1879 1883 1887 1891 1895 1899

New Zealand

Conclusion

States choose federation instead of IO when:

• Large gains from cooperation

• Large, and unequal, relationship-specific assets