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

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

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

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

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

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

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

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.

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

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

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.