In the baseline model, we assume that the number of potential brokers is exogenously given, but what will happen if they can choose endogenously whether to become a broker and compete for the principal’s selection? We follow the endogenous political candidate model fromBrollo et al.(2013) to incorporate this possibility, and the timing of the model becomes as follows:
1. Individuals decide whether to become brokers.
2. Brokers’ competenceη is revealed (but not to the principal) and they start to organize their networks.
3. The foreign principal hires the broker with the largest networks.
4. The “implicit election” is held. If the foreign principal successfully achieves her objective, the broker will distribute resources to the citizens in his network as promised in step 2. and extract the remaining resources as rents for himself.
We assume that the overall population (who have the potential to become brokers) is 2N. There are two groups of people, high quality (H) and low quality (L); each has population N. Within group, they have different competences to distribute resources and opportunity costs to become brokers.
Theithindividual in groupJ ∈ {L, H}has effectivenessηiJ, following an uniform distribution with densityξ and mean 1+µJ, whereµH =µ =−µL; his opportunity costs to become a broker isik;
thus high quality individuals on average have higher competence to distribute resources. Besides, once a broker from groupJ ∈ {L, H}gets selected and starts distributing resources for his principal, his behavior has a probability ofq(r+R)getting caught by the domestic government, and he will suffer an utility loss ofλJ, where we assume thatλH > λL. This assumption reflects the feature that when the rent-seeking behavior is caught, a high type broker suffers larger reputation costs than a low type broker.
Based on the setup above, the decision rule for theithindividual in groupJ ∈ {L, R}to become a broker is to satisfy the following inequality:
ik≤PJ[(PFJ −qλJ)(r+R)] (3.4)
wherePJ is the probability for an individual in group J to be selected by the foreign principal; PFJ is the probability of achieving the objective if the principal hires a broker from group J.
Since the foreign principal will hire the broker with the largest network size, and the domestic citizens will correctly anticipate this in the equilibrium, it’s equivalent to saying that the principal will hire the broker with the highest competence in the equilibrium. Thus we can derive PJ using order statistics and derive the equilibrium number of brokers in each group (the detail is in Appendix A.4).
Our objective is to find the relationship between the total resources assigned to the selected broker and the overall quality of brokers. We define the overall quality of brokers as the percentage of low type brokers in the pool of brokers:
Π= n
L
nH+nL (3.5)
wherenJ is the number of people who decide to become brokers in group J. It turns out that we can find a pair of valuesλH and λL such that the percentage of low type brokers positively correlates with the amount of total resourcesΩ.
Proposition 3. ∃ λH & λL s.t. ∂Π∂Ω > 0. That is, an exogenous resource windfall can reduce the proportion of high type brokers, and thus do harm to the foreign principal.
This result echoes the idea of “political resource curse”, where an exogenous resource windfall could attract more low type people to run for office (since they have lower reputation costs of joining politics), and thus increase the possibility for rent-seeking behavior.
Chapter 4 Conclusion
Our baseline model and its extensions introduce three mechanisms that would influence the per-formance of broker-mediated economic engagement: information asymmetry, income inequality and endogenous brokers. First, the information asymmetry problem between the foreign principal and the selected broker creates room for the broker to target ideologically loyal and poor domestic citizens, which would be beneficial for the broker but detrimental to the principal’s winning prob-ability in the “implicit election”. Regarding income inequality, we introduce a measure similar to the Gini coefficient, and find that a higher income disparity between the rich and poor (higherθ) is beneficial to the principal; on the other hand, more poor people (smallern) would be bad for the principal when the society is already very unequal and good for the principal when the situation is more moderate. Lastly, when people can decide by themselves whether to become brokers, it’s shown that the “political resource curse” would also apply to the situation of broker-mediated eco-nomic engagement, which means that the overall quality of the pool of brokers would get worse as the selected broker obtain more resources from the principal.
For future research, in the empirical part it would be interesting to know whether our theoretical predictions make sense in the real-world data. Though it’s really difficult to test those predictions given the limited source and types of data (most are surveys), we do observe more and more po-tential cases emerging. For example, a recent analysis from the Brookings Institution (2018) finds that the status of Israel among Arab regimes has changed from existential foe to unlikely ally, and suggests that this change in attitudes is due to efforts on Israel’s part that can be characterized as economic engagement. Since 2008, Israel has developed working security and economic ties with its former Arab rivals. Israel has assisted the security endeavors of Arab states through surveillance technology and intelligence sharing and bolstered their economies through energy exports and tech sector collaboration.
Theoretically, there are still plenty directions worth exploring. First, our analysis of income inequality could be further extended to the analysis of redistribution; it would be intriguing to know how redistribution in the domestic country would affect the performance of economic engagement from the foreign country. Another direction is about ideologies and beliefs: what will happen to the performance of economic engagement if worsening income inequality results in political polar-ization among the domestic citizens? Theoretical framework fromBenabou and Tirole(2006) on the emergence and persistence of collective beliefs could provide some helpful guidance. Besides, social identities and nationalism might also play an important role in economic engagement. An interesting paper fromShayo(2009) provides both theoretical and empirical analyses on class and national identities and how personal identification of those identities would affect people’s prefer-ences for redistribution. If we think of economic engagement as one kind of income redistribution, then a change in self-identification of social identities could also affect the performance of economic engagement, as probably in the case of Beijing’s economic engagement on Taiwan and Hong Kong.
References
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Appendix A Proofs
A.1 Proof of Claim 1.
Proof. For citizens in the network and ideology smaller thanσj∗, if there is a citizen k who doesn’t support the foreign country, the broker n could increase his or her promised resources by moving some resources from the citizen with ideologyσj∗ so that Equation (2.4) is satisfied for citizen k.
It’s feasible since citizens with ideology≤σj∗are cheaper to buy. For citizens outside the network and ideology smaller thanσj∗, they will support the foreign country if Equation (2.5) is satisfied, which would surely hold if their ideology is less thanσj∗.