Review of Law & Economics
Editor-in-Chief: Parisi, Francesco / Engel, Christoph
Ed. by Cooter, Robert D. / Gómez Pomar, Fernando / Kornhauser, Lewis A. / Parchomovsky, Gideon / Franzoni, Luigi
3 Issues per year
CiteScore 2017: 0.30
SCImago Journal Rank (SJR) 2017: 0.195
Source Normalized Impact per Paper (SNIP) 2017: 0.410
Compliance Institutions in Treaties
Due to the costs of negotiating treaties, signatories may defer the resolution of uncertainty to the future rather than include all possible states of nature in a treaty. This particularly will be the case when addressing uncertainty will increase the negotiating costs. In such a context, the existence and form of compliance institutions is of particular importance. We develop a formal model to consider the relationship among treaty negotiation, compliance institutions, and uncertainty over future states of nature. In our model, states of nature determine the costs of compliance with a treaty. We explain that when resolving uncertainty is deferred to the future and compliance costs are unobservable, an escape clause facilitates viability of a treaty. When escape is considered to be de jure compliance, and signatories are incompletely informed about one another's compliance costs, an incentive for opportunistic breach arises. In such a context, we demonstrate that a dispute resolution mechanism that discloses compliance costs of a signatory invoking escape can deter spurious use of the clause. We incorporate uncertainty through the specification of a discrete time, continuous-state stochastic compliance function. Because many policies for which treaties are negotiated exhibit persistence in their costs of compliance, we contrast compliance cost processes with and without persistence. We explain how persistence in compliance costs that exhibit uncertainty may undermine the effectiveness of an escape clause, even with a dispute resolution mechanism. Persistence also increases the cost of negotiation by increasing the expected costs of compliance, which may result in fewer commitments, rendering the treaty less viable. We examine two options to mitigate these effects: dynamic adjustment of commitments through an institutional compliance structure specified in the treaty, and renegotiation. When an escape clause fails to preserve compliance under persistence, dynamic adjustment may be more likely, as renegotiation requires a stronger commitment to the agreement. When dynamic adjustment entails periodic scheduled reconvening of signatories, however, compliance may be undermined and disputes may be more frequent.
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