Targeting Autocrats: Economic Sanctions

and Regime Change

Manuel Oechslin,
University of Bern / World Trade Institute

October 12, 2010

Abstract
When it comes to international economic sanctions, the most frequent goal is regime
change and democratization. Up to now, however, such sanctions have usually failed to
achieve their stated goal. Paradoxically, in some cases, they even made the targeted
regimes resort to policies which severely compounded the economic hardship. The present
political-economy model oers an intuitive explanation for these observations: To avoid
sanctions-induced challenges, threatened regimes lower the supply of public services in or-
der to reduce private-sector productivity and hence the resources of potential challengers.
This defense strategy only stops working if the sanctions reach a certain intensity. Yet,
in practice, the required level might be very high. According to the model, it depends
among other things on the states bureaucratic capacity and on the degree to which the
private sector relies on modern technologies.
JEL classication: F51; O11; O19; Q34
Keywords: Economic sanctions; regime change; democratization; state capacity

Contact details: University of Bern, World Trade Institute, Hallerstrasse 6, 3012 Bern, Switzerland; phone:
+41 31 631 36 73; fax: +41 31 631 36 30, email: manuel.oechslin@wti.org.
1
1 Introduction
Over the course of the 20th century, economic sanctions have become an increasingly important
foreign policy tool. Since the outbreak of World War I, there has been a total of 187 sanctions
episodes, about 66 of which started after the collapse of the Soviet empire (Hufbauer et al.,
2007; Tables 1A.1 and 1A.2). Economic sanctions usually combine restrictions on international
trade and investment and are generally viewed as an instrument to induce specic changes in
a target country. In practice, sanctioning states have indicated a variety of goals but the most
frequent by far is to promote democratization by pushing autocratic (or even despotic) regimes
out of power (46% of the cases in the 19142000 period).
So far, however, our knowledge about how economic sanctions might foster regime change
and democratization is very limited. There is just a general notion that, as Mack and Khan
(2000) put it, the pain inicted by sanctions on citizens of target states will cause them to
pressure their government into making the changes demanded by the sanctioning body. But
very little analytical work has actually been devoted to the exact channels through which
sanctions are supposed to promote democratization. As a result, our understanding of the
factors determining the likelihoods of success and failure is highly incomplete. It is the purpose
of the present paper to make some progress in this direction by building a political-economy
model which reects the basic features of a typical target country.
Past experiences with the eectiveness of sanctions leave no doubt that a better knowledge
about their potential and limitations is required. Available evidence suggests that sanctions
aiming at regime change and democratization have a particularly poor track record: According
to the standard set by Hufbauer et al. (2007), 35% of the sanctions episodes in the 19142000
period can be labeled as at least partly successful which means that the stated goal was
at least partly achieved and that the sanctions contribution was at least substantial. The
success rate is much lower, however, when we concentrate on sanctions imposed to promote
regime change and democratization in autocracies. In total, there were 57 such episodes but
only 12 of them (or 21%) can be judged as at least partly successful.
1
In the remaining 79%
of the episodes, the imposed measures failed to promote their stated goal. In ve cases (or
9%), it appears that they even made a negative contribution.
Recent anecdotal evidence further challenges the simple view on how sanctions should work
and highlights the need for a deeper understanding of the underlying mechanisms. As discussed
1
A regime is classied as autocratic if the Polity score (Marshall and Jaggers, 2008) is zero or lower. Note
that in 23 cases sanctions to promote regime change were imposed on fairly democratic states with a Polity
score above zero. I do not look at these cases since I am interested in the impact of sanctions in autocracies.
2
in the following section, the pain inicted on ordinary citizens by the sanctions against Haiti
(19911994) and Iraq (19902003) did not force the respective governments to give in. Quite
the contrary: After the sanctions had been imposed, both governments pursued policies which
severely compounded the economic hardship caused by the trade and investment embargos.
Referring to the situation in Iraq, Mueller and Mueller (1999, p. 49) even note that the
countrys political leadership sometimes seems more interested in maximizing the nations
suering (. . . ) than in relieving it. Clearly, such observations require explanation.
2
The political-economy model I am proposing to study the impact of sanctions rests on three
natural elements. First, consistent with the focus on regime change and democratization, I
consider an autocratic target country, i.e., a country where the government has substantial
leeway to implement its preferred policies but also to divert public resources for its own benet.
Second, the state plays an important role in the private sector of the economy: By providing
public goods, the government can aect the productivity of private rms and hence the citizens
incomes. Third, challenging the incumbent government in order to promote a transition to
democracy imposes an economic cost on the citizens. Interestingly, in such an environment,
intensity and eectiveness of sanctions are related in a non-monotonic fashion: As the intensity
increases from a low level, matters are initially bound to get worse in the sense that the
sanctions fail to promote democratization but just push public policies further away from the
democratic ones which is exactly what we observed in Haiti and Iraq. Only if the coercive
measures reach a certain potentially very high intensity will economic sanctions become
eective in the sense that they start to destabilize the incumbent regime.
The intuition behind this non-monotonicity result is easy to convey: As intended, the
imposition of sanctions makes a switch to democracy more rewarding to the ordinary citizens;
hence, the sanctions may render the previously reluctant citizenry more inclined to engage
in revolutionary activity. Yet, this is exactly what the ruler wants to prevent by making
revolutionary activity more costly and a straightforward way to do so is to decrease the
supply of public goods: With a lower level of public goods, the citizens incomes are lower and,
as a consequence, a given cost associated with revolutionary activity translates into bigger loss
in terms of instantaneous utility. This strategy of deliberately worsening economic policies
only stops working if the supply of the public goods hits the lower bound. At this point, the
sanctions indeed start to destabilize the incumbent regime.
2
Obviously, regimes may behave like this for propaganda purposes, i.e., to highlight how inhumane the
sanctions are. However, this cannot be the entire story since the regimes harmful responses are not restricted
to easily accessible areas but can also be found in the hinterland which are rarely visited by journalists.
3
The present analysis also makes a number of comparative-static predictions which might be
interesting from a policy perspective, in particular when it comes to assessing the eectiveness
of impending sanctions measures. Among other things, the model implies that the minimum
intensity to make sanctions work is lower if the states bureaucratic capacity is higher or if the
private sector has access to more advanced technologies. With a higher bureaucratic capacity,
the governments ability to interfere with the private sector (e.g., in the form of excessive taxes
or levies) is more pronounced; as a result, being under the rule of a self-interested dictatorial
regime carries a higher cost. Similarly, if private-sector technologies are more advanced (i.e.,
depend substantially on the supply of a number of public goods), inadequate policies pursued
under a self-interested dictator are more costly to the citizens.
There are few theoretical papers dealing with the impact of sanctions on the political
struggle in autocracies. Kaempfer and Lowenberg (1992), for instance, analyze the role of
sanctions in helping the domestic opposition to overcome the free rider problem associated
with revolutionary activity. More closely related, starting from Wintrobes (1990) dictatorship
model, Kaempfer et al. (2004) focus on the political impact of economic sanctions placed
on autocracies in order to alter certain undesirable policies. Finally, Lektzian and Souva
(2007) explore why sanctions are less likely to succeed against autocratic targets than against
democratic ones. None of these contributions, however, explicitly deals with regime change and
democratization nor does any of them address why threatened autocrats may nd it optimal
to compound the hardship inicted by the sanctions.
3
The rest of the paper is organized as follows. Section 2 reviews anecdotal evidence docu-
menting how threatened regimes responded in an extremely harmful manner to the imposition
of economic sanctions. Section 3 introduces the basic framework and discusses the main results.
In Section 4, I present an interesting extension of the model which allows for heterogeneity
among the citizens. Section 5 discusses policy implications and Section 6 concludes.
2 Anecdotal Evidence from Haiti and Iraq
This section reviews some anecdotal evidence from two recent target countries, Haiti (1991
1994) and Iraq (19902003). Besides being well-studied cases, these two sanctions episodes
have in common their prime purpose, namely ousting a highly autocratic regime in order to
reinstate (Haiti) or establish (Iraq) democracy. In each case, before outlining the regimes
3
In an empirical paper, Marinov (2005) looks at whether economic sanctions destabilize country leaders.
This does seem to be the case, though to a much smaller extent in autocracies.
4
policy responses, I will briey review some facts about the imposed sanctions.
Haiti (19911994). In 1990, Haiti saw for the rst time fair and democratic presidential
elections. The vote produced a clear winner, Jean-Bertrand Aristide, who was sworn into
oce in February 1991 (see, e.g., Werleigh, 1995, for details). The new president promised to
eliminate power and privileges of the old political elites. Yet, this process came to an abrupt
halt when a military coup ousted Aristide after just seven months in oce. As an immediate
response, the Organization of American States, including the United Sates, imposed economic
sanctions. Initially, these non-mandatory sanctions were targeted at the Haitian government
but subsequently became more comprehensive and included severe limitations on most imports
and exports from Haiti. Eventually, in June 1993, the United Nations imposed mandatory
sanctions, comprising inter alia an oil and arms embargo. However, even with U.N. backing,
the sanctions did not achieve their goal; in the end, it was a U.S. military operation that
restored democracy in September 1994. The sanctions were lifted in October.
During the time the sanctions were in place, economic activity declined signicantly (ac-
cording to the World Banks WDI, by about 10% p.a.) and the state almost ceased to function:
As noted by Elizabeth Gibbons (1999, p. 31), then UNICEFs representative in Haiti, the new
constitutional government found a thoroughly debilitated, atrophied state structure when
taking over in October 1994. Moreover, Gibbons points out that the state infrastructure
was even more dilapidated than it had been in 1991. It is clear that the sanctions directly
challenged the states ability to perform its functions.
4
However, the rulers own behavior
signicantly contributed to this decline. Evidence for the authorities destructive role comes,
inter alia, from the agriculture and infrastructure sectors: Werleigh (1995, pp. 1667), for
instance, points out that the authorities systematically destroyed part of the agricultural in-
frastructure and prevented technicians from oering their services to the farmers. In addition,
by arbitrarily expropriating the farmers returns, they wiped away any incentive to invest in
economic activity. There is also evidence that hundreds of thousands of skilled farmers were
forced to abandon their working places, causing a further reduction in agricultural production.
Similarly, Gibbons and Gareld (1999, p. 1501) report that the authorities hampered the
functioning of local water management committees and, as a result, compounded the supply
problems stemming from the embargo.
4
For instance, Gibbons (1999, p. 19) argues that the petrol embargo forced schools to operate only three days
a week because teachers could not aord transportation to work. Some observers, however, are not convinced
that direct eect of the embargo was substantial. They point out that embargo was only weakly enforced,
partially lifted from time to time, and excluded the necessities of life (see, e.g., Werleigh, 1995, pp. 1645).
5
Similar examples of harmful government policies can be found in the public health sector.
In 1991, after decades under kleptocratic rule, the public health system had already been in a
poor state (obviously, the Aristide government could not improve things in just seven months).
Yet, even when compared to the dire standards of preceding autocratic regimes, the policies
during the sanctions period were extremely poor. In particular, there is evidence that the
new rulers deliberately weakened the battered health system even further: Gibbons (1999, p.
49), for instance, reports that there were occasions when the the authorities deprived the entire
system of a broad set of vital supplies by impounding medicine, humanitarian fuel, etc.; further
examples include the hasty abandonment of vital immunization programs. More generally,
Gibbons (1999, p. 50) concludes that the governments (and the militarys) policies in the
public health sector were extremely harmful, thereby directly contributing to the violations
of the populations basic right to life and health. This assessment is supported by other local
observers, among them Farmer et al. (2003, p. 420) who note that the sharp fall in the quality
and coverage of [health] services was largely due to the striking absence of commitment to
public health on the part of the Haitian army.
In sum, the evidence suggests that government policies during the sanctions period were
even poorer than those pursued during the three decades (19571986) of personal rule by the
Duvalier family. There is no doubt that, by contributing to the collapse of public services and
the countrys infrastructure, Haitis military and the various de facto governments in oce
between 1991 and 1994 considerably deepened the hardship caused by the sanctions.
Iraq (19902003). The sanctions against Iraq were imposed by the United Nations Security
Council in August 1990 in response to the Iraqi invasion of Kuwait. The sanctions regime was
comprehensive but did not include medicines, health equipment or foodstus (see, e.g., Reuther,
1995, for details). Moreover, in August 1991, the Security Council authorized the sale of oil
in order to pay for the import of humanitarian goods; yet, this opportunity was not taken up
by the Iraqi government before 1996. The sanctions had two goals, impairing the countrys
military potential and promoting regime change and democratization. While the rst goal
was probably achieved, the second clearly was not. Once again, it took a U.S.-led military
operation to oust the incumbent regime. After that, in May 2003, the sanctions were lifted.
When it comes to government policies during the sanctions episode, there are many parallels
to the Haitian case. With a comprehensive embargo in place (and the infrastructure damaged
by the Gulf War), it was clearly dicult to keep public services going. Yet, many observers
emphasize that the government actively contributed to worsening the situation. Reuther (1995,
6
pp. 126, 130), for instance, reports that in large parts of the country the Iraqi regime did not
even try to maintain the basic functions of the state or to repair the damaged infrastructure.
Instead, the rulers deliberately deprived a substantial fraction of the population of government
services and participation in the economy. About 3.1 million people in northern Iraq were even
subjected to a total internal embargo. In addition, a large number of displaced people were
not allowed to return to their homes and thus could not resume work.
As in the Haitian case, the public health sector provides further examples of destructive
government behavior. For instance, in an article for the New York Times (Were Sanctions
Right?, July 27, 2003), David Rie reports that although there were more than enough
drugs for the political elites the authorities deprived the population of medical supplies so
that ordinary citizens had been subjected to two sets of sanctions, those of the United Nations
and those of Saddam Hussein himself.
5
Such observations are also mirrored in a remark by
Hans von Sponeck, then the U.N. coordinator for humanitarian assistance, who according to
the above-mentioned newspaper article highlighted that local repression and international
sanctions became brothers-in-arms in their quest to punish the Iraqi people for something they
had not done. Anecdotal evidence of this type may also constitute the basis of Mueller and
Muellers (1999, p. 49) conclusion that, after the imposition of sanctions, the Iraqi rulers were
more interested in maximizing the nations suering than in relieving it.
Gibbons (1999, p. 39), nally, argues that the hardship caused by the sanctions and the
governments harmful policies decisively weakened the populations ability to challenge the
Iraqi regime. This claim is supported by another report from Iraq in the New York Times
(As Hussein Builds, His People Struggle To Live, January 31, 1998) which cites a diplomat
as saying that if any sector of society outside the military might have formed a political oppo-
sition, the Iraqi middle class would have been the only hope. Yet, so the diplomat continues,
it has now been totally destroyed. An Iraqi intellectual quoted in the same article puts
it more bluntly: With our noses to the grindstone, who can think?
3 The Model
3.1 Assumptions
Agents, preferences, and economic activity. I consider an innite-horizon economy in
discrete time. The society starts out with two dierent groups of agents, i {0, 1}. Group
5
According to Gareld (1999), Iraq had invested heavily in health services in the 15 years prior to the
embargo and maintained an advanced public health system before the sanctions hit in 1991.
7
0 constitutes the ruling elite and is of an arbitrarily small but positive measure -. Group 1
consists of ordinary citizens and its size is normalized to unity. In what follows, I completely
abstract from within-group dierences and assume that all members of a specic group act in
cohesion. As a result, each group can be treated as a single actor.
All individuals derive utility from consumption of a non-storable nal output good (which
also serves as the numraire). Preferences are given by the intertemporal utility function
l
I,|
= 1
|
(

X
s=0
,
s
lnc
I,|+s
)
, (1)
whereas c
I,|
refers to consumption by the representative member of group i {0, 1} in period
t and , (0, 1) denotes the discount factor. Note that the instantaneous utility function is
logarithmic. This feature will be important for the results as it implies that the marginal utility
of consumption becomes arbitrarily large as consumption goes to zero.
Figure 1 here
The nal good originates from two dierent sectors. First, it is produced by the citizens who
constitute the private sector of the economy. In particular, in each period t, the representative
citizen generates an income (i.e., output minus cost of input factors) of
j
|
=
|
(1(G
|
) j
|
) (2)
units of the nal good, whereas G
|
stands for the level of the public good in period t and 1 is
an increasing function which is depicted in Figure 1 and dened according to
1(G) =

1
l
: G
l
G < G
n
1
n
: G
n
G < G
|
1
|
: G
|
G <
, (3)
with 1
l
G
l
= 0. Assuming that the state can promote private economic activity by providing
a public good (e.g., by building infrastructure, upholding law and order, enforcing private
contracts, etc.) is both natural and important for the results. Imposing a step function,
however, is just for analytical convenience and could be relaxed. Note that the citizens incomes
further depend on the productivity parameter
|
which is taken to reect the extent to which
critical foreign input factors can be accessed in the domestic economy. As discussed below,
this productivity parameter will constitute the channel through which economic sanctions may
directly aect the economy. Finally, as detailed further below, the term j
|

|
reects the
reduction in individual incomes if the citizens choose to challenge the ruling elite.
8
The second source of the nal good is the natural resource sector. I assume that the
entire sector is owned by the government which is a good approximation to reality in many
resource-rich countries (see, e.g., Gersovitz and Paxson, 1996, pp. 2058). The endowment
with resources is given by a stream of 0 units which allows for an income of
|
to
be generated in each period t. The income in this sector does not depend on G
|
as resource
extraction is usually concentrated in a few locations and carried out by big companies which
tend to be self-sucient. It is, however, natural to assume that the resource income does
depend on
|
, i.e., on the variable reecting the accessibility of critical foreign input factors.
Policies and the government budget. In each period t, two policies have to be deter-
mined. First, there has to be a decision on the uniform tax rate on the citizens incomes. The
tax rate is denoted by t
|
and it cannot exceed a certain upper bound, c < 1. Limiting the
governments ability to tax is necessary to generate interesting implications; yet, imposing a
maximum tax rate is just a reduced-form way of modeling more realistic limits to taxation.
6
Figure 2 here
The second policy choice is the one with respect to the level of the public good. There
are no exogenous limitations in this regard but providing the public good comes at a price.
More specically, the cost associated with G
|
is given by
|
G
|
units of the nal good. Note
that imposing the cost to be proportional to
|
is quite reasonable. Although not explicitly
modeled, the idea is that the wages in the bureaucracy and hence a large fraction of public
expenses tend to move in lockstep with the incomes in the other sectors of the economy.
As for the relationship between the social benet and cost of the public good, I assume that
1
|
G
|
1
n
G
n
1
l
G
l
0. (4)
Together with (2) and (3), the above condition immediately implies that the surplus-maximizing
level of G
|
(which will prevail under democracy) is given by G
|
. Yet, in order to introduce a
tension between the citizens and the rulers policy preferences, I further impose
c1
n
G
n
c1

0, , {|, /}, (5)

which ensures that the rulers preferred level of the public good is G
n
, other things equal.
Figure 2 illustrates (4) and (5). It shows how productive public spending relates to both
private-sector income (Panel a.) and maximum tax revenues (Panel b.).
6
In reality, raising taxes is costly, and disproportionally so for high tax rates (as, e.g., modeled in Acemoglu
and Robinson, 2001). Thus, the revenue-maximizing rate (which is an interpretation of c) lies below 100%.
9
Finally, regarding the public budget, I assume that the government cannot go into debt so
that the current public revenues must not be smaller than the expenditures. In formal terms,
t
|

|
(1(G
|
) j
|
) +
|

|
G
|
+-c
0,|
. (6)
Political regimes and the transition of political power. There are two political regimes,
dictatorship and democracy. In what follows, I denote the political state by o
|
{1, 1},
whereas 1 stands for democracy. Under dictatorship, policies are set by the small group of
elite agents (i.e., by the minority). Democracy, on the other hand, means that the policies are
determined by the large group of ordinary citizens (i.e., by the majority).
The economy starts as a dictatorship (o
0
= 1). However, as long as o
|
= 1, the rulers
power is continuously threatened. Specically, in each period t, the citizens may attempt to
oust the ruling elite. The citizens decision in this respect is denoted by j
|
{0, 1}, with
1 indicating a revolt. If the citizens indeed choose j
|
= 1, democracy will be irreversibly
established with a positive probability j (i.e., with probability j, o
|+1
= o
|+2
= = 1);
7
moreover, in case of success, the elite is longer part of the game from t + 1 onwards but each
member receives a continuation value of \(1) . With probability 1 j, however, a
revolt fails and political state does not change between t and t + 1.
The political state is also unchanged if the citizens abstain from revolting against the ruler
(j
|
= 0). Abstaining may indeed be an option because staging a revolt is costly. In particular,
if the citizens decide to topple the regime, each citizen bears an individual cost of
|
units of
the nal good. In the context of the present model, it is most natural to think of this burden
as reecting an increase in production costs: Fighting the regime is time consuming and leads
to a reduction in labor input which is compensated by purchasing alternative inputs.
8
Finally, it is convenient to introduce some technical assumptions. First, I impose
< 1
l
and 1
n
< c, (7)
whereas c (1 ,(1 j)),(,j). The relevance of these assumptions will be extensively
discussed in the following section. Second, I assume that when challenged the ruler loses
part of the current tax revenues so that it prefers G
l
over G
n
. This assumption is not important
for the main results but simplies the exposition of the equilibrium below.
7
Imposing 1 to be an absorptive state is not crucial for the results, however. In a simple extension of the
model which includes a return to 1 with probability q 0 in each period the results are very similar.
8
The citizens may be forced to recruit additional sta from a subsistence sector (from which I abstract
here, however). Another interpretation is that they directly hire insurgents (see, e.g., Grossman, 1991).
10
Economic sanctions. The sole aim of the sanctioning body which is called the sender
state for simplicity is to induce regime change and democratization (i.e., a transition from
state 1 to state 1). To pursue this goal, the sender state may impose sanctions which deplete
the productivity of the domestic economy.
9
More specically, the sender state can push the
productivity parameter
|
below its natural level which is normalized to 1. In reality, such a
negative impact on productivity is often achieved by imposing both restrictions on international
trade, especially the denial of critical imports, and restrictions on foreign direct investment.
Moreover, as far as developing countries are concerned, these measures frequently come in
combination with an interruption of foreign assistance which may depress productivity even
further (see, e.g., Hufbauer et al., 2007, pp. 45-48).
As for the sanctions strategy, I assume that the only variable the sender state can condition
on is the political state, o
|
. This seems to be a reasonable assumption because, in practice, it is
dicult for a foreign authority to exactly observe and assess the targeted regimes policy choices
or the actions chosen by the opposition (which represent the models remaining endogenous
variables); moreover, even if this were possible, the foreign decision makers (e.g., the U.S.
Congress or the U.N. Security Council) would hardly have the capacity to review and adjust
sanctions decisions after every single policy decision in the target country. Thus, it seems
natural to focus on strategies of the form

|
=

1 : o
|
= 1
: o
|
= 1
,
whereas < 1. Moreover, for further use below, it is convenient to introduce 1, [1, )
as a measure for the intensity of the sanctions regime imposed.
Equilibrium concept and time-line. The focus is on the (pure strategy) Markov Per-
fect Equilibrium (MPE), where strategies depend only on the payo-relevant states and prior
actions within the same period. In the present set-up, the only state variable is o
|
.
Suppose rst that o
|
= 1. Then, the timing of events is as follows: First, the ruler
determines the policy vector,
|
= (t
|
, G
|
). Second, the citizens decide whether or not to try
to oust the regime. Third, all decisions are implemented, the payos materialize, and the period
ends. If the ruler has not been challenged (j
|
= 0), the political state remains unchanged (i.e.,
o
|+1
= 1). Otherwise, the ruler is ousted with probability j in which case there is a switch to
democracy (i.e., o
|+1
= o
|+2
= = 1 with probability j).
9
The present analysis abstracts from so-called smart sanctions which frequently include freezing the rulers
oshore assets, prohibiting trade in specic goods (like luxury goods or arms), or imposing travel bans.
11
Suppose now that o
|
= 1. Then, the citizens determine
|
, these policies are immediately
implemented, the payos materialize, and the period ends (whereas o
|+1
= 1).
3.2 Analysis
3.2.1 The Equilibrium under Democracy
It is convenient to derive the equilibrium under democracy rst. To do so, note that the
government budget constraint under democracy simplies to t
|
1(G
|
) + G
|
because the
elite is no longer part of the game and hence no longer consumes or faces challenges. Moreover,
the constraint must hold with equality since imposing taxes higher than necessary to nance
public expenses is clearly suboptimal. Thus, we have t
|
= (1(G
|
)),G
|
so that consumption
by the representative member of group 1 is given by
c
1,|
= 1(G
|
) G
|
+.
Clearly, because of (3) and (4), maximizing the above expression requires G
|
= G
|
. As a result,
all citizens agree on the policy vector
|
= ((1
|
),G
|
, G
|
). Moreover, since switching back
to 1 is impossible, identical policies will be implemented in all future periods t + 1, t + 2, .
Thus, the uniform level of utility incurred by each citizen is
\ (1) =
ln(1
|
G
|
+)
1 ,
. (8)
3.2.2 The Equilibrium under Dictatorship
I now describe the MPE under dictatorship. The rst step is to highlight the basic trade-o
the two groups of citizens face when deciding on whether or not to challenge the ruler.
The basic trade-o. Obviously, in a given period t, an individual citizen is not in favor of
a challenge if the private cost of doing so exceeds the expected benet. In formal terms, given

|
= (t
|
, G
|
), the representative citizen prefers not to revolt if
ln ((1 t
|
)1(G
|
)) +,\ (1) ln((1 t
|
)(1(G
|
) ) +, (j\ (1) + (1 j)\ (1)) ,
whereas \ (1) stands for the citizens value function under dictatorship. Note that the right-
hand side of the above expression accounts for the fact that, if the citizens try to oust the ruler,
the probability of success (i.e., of a transition to state 1) is only j. By rearranging terms, the
above condition simplies considerably to
ln

1(G
|
)
1(G
|
)

,j (\ (1) \ (1)) . (9)

12
Condition (9) is a key equation of the present analysis. The left-hand side reects the cost
of challenging the ruler in terms of lower instantaneous utility: In the case of a revolt, the
current income and hence the current level of consumption is reduced. The right-hand side
gives the benet in terms of an expected increase in the continuation value: With probability j,
democracy (i.e., the state under which the citizens utility is maximized) will be permanently
established from period t +1 onwards. Thus, the condition states that a given citizen does not
support a challenge if the short-run utility cost exceeds the expected long-run benet.
The following lemma establishes two implications which independently of the sanctions
regime in place can be immediately derived from the above condition:
Lemma 1 In any Markov Perfect Equilibrium, as long as o
|
= 1, the ruler (i) sets the
maximum tax rate (i.e., t
|
= c); (ii) does not choose levels of G other than G
n
or G
l
.
Proof. See Appendix.
The intuition behind the rst claim is straightforward: The current tax rate, t
|
, does not
enter condition (9) and hence cannot inuence the citizens current decisions on j
|
. As a result,
whether or not the ruler faces a challenge is independent of current taxes which means that
the ruler simply chooses the tax rate he prefers. As for the level of the public good, it is obvious
that all levels except G
l
, G
n
, and G
|
cannot be optimal. But why can the level G
|
be ruled
out? Intuitively, opting for G
|
cannot occur in an MPE because a (one-time) deviation to G
n
must increase the rulers utility: Choosing G
n
over G
|
increases the current budget surplus
and hence the rulers consumption; but doing so also raises the cost of an attempted revolution
which is given on the left-hand side of (9). Thus, while strictly improving the rulers current
level of consumption, such a deviation cannot trigger a challenge.
Equilibrium 1 (Unchallenged dictatorship with poor economic policies). It is now conve-
nient to describe the dierent types of equilibria and how they relate to the intensity of the
sanctions regime. The rst constellation I look at is <
1
(mild sanctions), whereas

1
=

1
n
1
n

(1)
(1 c)1
n
1
|
G
|
+
. (10)
Under these circumstances, there is a MPE where
|
= (c, G
n
) and j
|
= 0 for all t.
To see this, it is convenient to go backwards through a given period t. So suppose that we
are at the point where the citizens have to decide whether or not to challenge the ruler. Clearly,
the citizens best response to
|
= (c, G
n
) is to avoid a challenge if and only if (9) is satised.
To check the validity of this condition, note that given that the assumed equilibrium policies
13
are implemented in all future periods t + 1, t + 2, we have
\ (1) =
ln ((1 c)1
n
)
1 ,
. (11)
Then, taking equations (8) and (11) into account, the decisive condition for j
|
= 0 becomes
ln

1
n
1
n

,j
1 ,
ln

1
|
G
|
+
(1 c)1
n

,
which is equivalent to <
1
. Thus, given that the ruler chooses
|
= (c, G
n
) in the rst
step, the citizens will indeed subsequently decide in a way that gives rise to j
|
= 0.
Moving one step backwards, it remains to analyze the rulers choice of
|
. Given that

|
= (c, G
n
) maximizes the rulers current consumption (condition 5), and since this choice is
followed by j
|
= 0, the ruler has no incentive to deviate from this policy combination either.
Thus, if (and only if) we have <
1
, this type-1 equilibrium does exist.
In order to identify additional possible types of equilibria, it is now convenient to dene
the function : 7 7(7), whereas 7 (, ) and
(7) =

7
7
(1)
(1 c)7
1
|
G
|
+
so that
1
= (1
n
). In addition, for further use below, I establish the following result:
Lemma 2 The function : 7 7(7), 7 (, ), is strictly decreasing if 7 < c.
Proof. See Appendix.
Equilibrium 2 (Unchallenged dictatorship with disastrous economic policies). The second
constellation is
1
<
2
(substantial sanctions), whereas

2
=

1
l
1
l

(1)
(1 c)1
l
1
|
G
|
+
. (12)
Under these circumstances, there is a MPE where
|
= (c, G
l
) and j
|
= 0 for all t.
This equilibrium can again be established by backward induction. An approach completely
similar to the one above shows that given that the assumed equilibrium policies are imple-
mented in all future periods t + 1, t + 2, we will have j
|
= 0 in response to
|
= (c, G
l
)
if and only if <
2
. Moreover, it is straightforward to see that
1
= (1
n
) <
2
= (1
l
)
directly follows from (7) and Lemma 2.
Moving one step backwards, it remains to be checked whether the ruler is actually best
o by opting for G
l
in the rst step of period t. This is the case if a deviation to G
|
= G
n
14
would trigger a revolt against the elite. By looking at the citizens decision problem once more
(condition 9), one can establish that they would be in favor of a challenge if
ln

1
n
1
n

,j
1 ,
ln

1
|
G
|
+
(1 c)1
l

,
which is equivalent to (1
l
,1
n
)
1
. But this latter inequality must be satised since
(1
l
,1
n
) < 1 and the focus is on the case
1
<
2
(substantial sanctions). Thus, if
lies in the above-mentioned range, the type-2 equilibrium does exist.
10
Equilibrium 3 (Challenged dictatorship with disastrous economic policies). Finally, in the
case of
2
(comprehensive sanctions), there is a MPE where
|
= (c, G
l
) and j
|
= 1 as
long as the political regime is dictatorial (o
|
= 1).
To see this, lets again focus rst on the citizens decisions on whether or not to challenge
the ruler. Clearly, the citizens best response to
|
= (c, G
l
) is to be in favor of a challenge
if and only if (9) is violated. To check this, note that given that the assumed equilibrium
policies are implemented in all future periods t + 1, t + 2, we have
\ (1) =
ln

(1 c)(1
l
)

+,j\ (1)
1 ,(1 j)
. (13)
Then, taking (8) and (13) into account, the decisive condition for j
|
= 1 becomes
ln

1
l
1
l

,j
1 ,(1 j)
ln

1
|
G
|
+
(1 c)(1
l
)

.
It turns out that this condition is satised if
2
which was exactly imposed above.
Moving one step backwards, it is clear that given that the assumed equilibrium policies
are implemented in all future periods t+1, t+2, the ruler has no incentives to deviate from

|
= (c, G
l
): Opting for either G
n
or G
|
would just decrease the utility cost of a challenge
and hence could not make the citizens abstain from trying to oust the ruler. Thus, the ruler
inevitably faces a challenge later on in the period which means that G
l
is the preferred option.
Thus, if (and only if) we have
2
, the type-3 equilibrium does exist.
Further results and summary. Two additional results are worth noting. First, there
are no further equilibria: Lemma 1 rules out all policy vectors other than (c, G
l
) or (c, G
n
);
moreover, a MPE where
|
= (c, G
n
) and j
|
= 1 (as long as o
|
= 1) cannot exist since in
anticipation of a revolt the ruler prefers G
l
. Second, the use of sanctions cannot improve the
citizens welfare: In a given equilibrium, \ (1) decreases monotonically as goes up; moreover,
10
More precisely, the type-2 equilibrium does exist if (and only if) we have (1

)
1
<
2
.
15
\ (1) drops discontinuously as soon as reaches
1
(since the supply of the public good falls)
and does not improve when reaches
2
(since at that point the citizens are indierent as
to whether to revolt). Note, however, that Section 4 revisits the welfare issue in a slightly
extended version of the model which allows for heterogeneity among the citizens.
Figure 3 here
Figure 3 above gives a graphical overview of how the intensity of the sanctions relates to
the three dierent types of equilibria. A complete picture of the models main implications is
presented in the following proposition (proof in the text):
Proposition 1 Suppose that
1
1. Then, depending on the intensity of economic sanctions,
the following three types of Markov Perfect Equilibria can exist:
Equilibrium 1: If <
1
(mild sanctions), there is an MPE where
|
= (c, G
n
) and
j
|
= 0 for all t (and there is also Equilibrium 2 if (1
l
,1
n
)
1
).
Equilibrium 2: If
1
<
2
(substantial sanctions), there is a unique MPE where

|
= (c, G
l
) and j
|
= 0 for all t.
Equilibrium 3: If
2
(comprehensive sanctions), there is a unique MPE where

|
= (c, G
l
) and j
|
= 1 as long as o
|
= 1.
Moreover, independently of the parameter values or the intensity applied, the use of eco-
nomic sanctions always reduces the welfare of the ordinary citizens in the target country.
Robustness issues. It is worth noting that depending on parameters some of the above
equilibria might not exist. For instance, it is possible that the actual parameter constellation
gives rise to
1
1 and
2
1. In this case, even in the absence of any sanctions, the economy
would be in equilibrium 2 and a rising sanctions intensity would just take it from there to
equilibrium 3. It will be the purpose of the following subsection to discuss in greater detail
how the dierent parameters aect the thresholds and hence the sequence of equilibria.
Finally it is interesting to highlight the role of the assumptions in (7). The lower bound on
1
l
is necessary for the type-3 equilibrium to exist: Clearly, if 1
l
and G
|
= G
l
, challenging
the regime would be impossible because doing so would require more resources than the citizens
have; thus, with 1
l
, the maximum the sanctions can achieve is to push the economy from
equilibrium 1 to 2 (while the threshold
2
no longer exists). Put dierently, in this case,
sanctions are incapable of destabilizing the regime. On the other hand, a violation of the
16
upper bound on 1
n
means that
1
<
2
is no longer necessarily true. So let us focus on
a violation which indeed implies
1

2
(otherwise, nothing changes in qualitative terms).
Under these circumstances, as can be checked along the lines demonstrated above, the economy
will no longer jump to equilibrium 2 but will go directly to the type-3 equilibrium as soon as
the sanctions intensity reaches the
1
-threshold. So, if
1

2
, the imposition of sanctions
no longer carries the risk of accidentally pushing the economy into its least satisfactory state.
3.3 Discussion of Results
Sanctions intensity and eectiveness. The central implication of the above analysis is
that as illustrated in Figure 4 intensity and eectiveness of sanctions may be related in
a non-monotonic way. Imposing an intermediate intensity may not only be ineective but
detrimental in the sense that such sanctions not only fail to promote democratization but
also push policies farther away from those preferred by the population (i.e., from poor to
disastrous). On the other hand, implementing a high-intensity regime may be eective in
the sense that it does improve the chances of regime change and democratization over time.
Figure 4 here
This non-monotonicity result is a direct consequence of the rulers defense strategy. The
ruler does not face any challenges to his power as long as the citizens feel that the (utility) cost
of a challenge is high relative to the expected benet. As the sanctions regime becomes more
intense, though, the expected benet from a switch to democracy rises. Thus, at some point,
the ruler has to increase to cost side in order to stay unopposed. This need to intensify the
pain explains exactly why domestic policies may worsen in response to tighter sanctions: By
providing a lower level of the public good, the ruler decreases the citizens current income and
hence increases the marginal product of consumption; as a result, the loss in income induced
by a challenge translates into a bigger drop in the instantaneous utility from consumption.
Yet, as soon as the supply of the public good hits its lower bound, this strategy of deliberately
worsening economic policies stops working. Under these circumstances, the pain can no longer
be increased and a further tightening of sanctions will inevitably destabilize the regime.
Comparative-static results. It turns out that the minimum intensity necessary to make
sanctions eective depends in a clear-cut way on the fundamental characteristics of the public
and the private sector of the economy. These characteristics include the states repressive and
bureaucratic capacities, the nations resource endowment, and the return to the public good.
17
The term repressive capacity refers to the states ability to ght o challenges to the power
of the ruling elite. In the model, this ability is reected by
1
and 1 j, i.e., by the cost
of challenging the ruler and by the probability that such a challenge will fail. Bureaucratic
capacity refers to the states ability to tax private economic activity (see, e.g., Besley and
Persson, 2009). In the present setup, bureaucratic capacity is simply captured by the maximum
tax rate c. The endowment with natural resources, on the other hand, is reected in the
parameter . Finally, return to the public good means the extent to which investing the
surplus-maximizing level improves consumption possibilities in the economy (i.e., how 1
|
G
|
relates to 1
l
). It is reasonable to think that this return is substantially inuenced by the degree
to which private-sector technologies are modern. For instance, as argued by Acemoglu et al.
(2007), more modern technologies require contracting with a larger number of suppliers. Thus,
if the rms rely on such technologies, increasing the quality of the contracting institutions may
substantially bring down transaction costs and hence boost rm prots to a larger extent.
How all these characteristics aect the minimum sanctions intensity can now be seen by
looking at
2
which gives the threshold for the existence of the type-3 equilibrium. The rst
observation is that
2
is increasing in the repressive capacity of the state: The higher the cost
of a challenge and the lower the probability of success, the higher the sanctions-induced pain
required to make the citizens revolt. The second comparative-static result is somewhat more
surprising: The stronger the bureaucratic capacity of the state, the lower the critical threshold.
The intuition is that with a stronger tax bureaucracy dictatorship is more painful to the
citizens since the ruler is able to appropriate a larger fraction of the private-sector output;
thus, under these circumstances, a switch to democracy is more rewarding. Finally, for related
reasons,
2
is also decreasing in the return to the public good (i.e., in the degree to which
private-sector technologies are modern) and in the size of the resource endowment: With
a higher productivity, the improvement in economic policies associated with a transition to
democracy leads to a stronger boost in aggregate consumption; similarly, with a larger natural
resource income, gaining control of this sector leads to a steeper increase in utility.
4 Heterogeneity and Social Welfare
The baseline version of the model leaves no room for economic sanctions to improve the citizens
welfare. Yet, as the present section will show, this is dierent in a slightly extended version
of the model which allows for heterogeneity among the ordinary citizens. In such a modied
setup, sanctions may not only be eective but may actually raise social welfare.
18
The modied setup. Suppose that the citizens are no longer identical but dier in terms of
the cost of revolutionary activity. This is a reasonable assumption since, to give an example,
the regimes capacity to ght back might dier across regions. More specically, suppose that
the citizens can be divided into two equal-sized (sub-)groups so that now i {0, 1, 2}, with 0
still referring to the elite. Without loss of generality, group 1 is assumed to consist of citizens
with an above-average cost of revolutionary activity,
|
( + ), while group 2 is made up of
citizens with a below-average cost,
|
( ). Suppose further that the two groups jointly
decide on whether or not to revolt against the ruler. Each groups decision in this respect is
denoted by j
I,|
{0, 1}, with 1 indicating approval. A revolt materializes if and only if both
groups are in favor (i.e., if j
|
j
1,|
j
2,|
= 1). Finally, note the denitions
1
+ and

2
which are used in the modied condition (7),

I
< 1
l
and 1
n
< c
I
, (7)
whereas i {1, 2}. Beyond that, no further deviations from the baseline model are assumed.
It can easily be checked along the lines demonstrated in Subsection 3.2 that these mild
modications do not change the nature of the results stated in the two lemmas and Proposition
1. The only dierence is that has to be replaced by
1
in the denitions of
1
and
2
(equations 10 and 12). As a result, in the modied setup, the minimum intensity required
to make the sanctions work is higher, other things equal. This implication is intuitive since
the decisive citizen, i.e., the representative member of group 1, now faces a higher cost of
revolutionary activity (whereas the average cost is unchanged).
Welfare implications. The welfare implications are now readily assessed. As is the case in
the baseline setup, a positive welfare eect can be ruled out if the type-3 equilibrium prevails
even in the absence of any sanctions (
2
< 1). Under these circumstances, the imposition of
sanctions does not lead to any behavioral changes but just decreases the citizens incomes (as
long as o
|
= 1). However, unlike in the baseline version, the impact on social welfare might
be positive if the ruling elite is unchallenged in the absence of sanctions:
Proposition 2 Suppose that
2
1 and denote by V(o
|
, ) the utilitarian social welfare
function which takes into account the utility of the citizens. Moreover, note that 1

{1
l
, 1
|
}
depending on the equilibrium that prevails if = 1. Then, we have
V(1,
2
) V(1, 1) =
1
(1 ,(1 j))(1 ,)
ln

(1
l

2
),(1
l

1
)

(1o)/2
[(1

,1
l
)
2
]
1o(1)
!
. (14)
19
Proof. See Appendix.
Equation (14) represents the change in social welfare that results from an increase in the
intensity of the sanctions from 1 (no sanctions) to
2
, i.e., to the critical level which is exactly
sucient to induce the type-3 equilibrium. Since
2
1 and 1

,1
l
1, the equation immedi-
ately reveals that the impact on social welfare can only be positive if the cost of revolutionary
activity diers across the two groups (i.e., if 0 so that
1

2
). The intuition is as follows:
A revolt against the ruler requires the consent of both groups. But this means that group 1
(which has the higher cost of revolutionary activity) may nd it optimal to dictate a non-
challenge equilibrium although group 2 might strictly prefer the type-3 equilibrium. In such a
situation, group 1 ignores the positive welfare implications of a challenge for group 2. Thus,
from the perspective of social welfare, the sanctions-free equilibrium may show an ineciently
low level of revolutionary activity. As a result, a sanctions-induced switch to equilibrium 3
can improve matters. Expression (14) further reveals that such a positive net eect is more
likely to materialize if, other things equal, the critical intensity
2
is low (because, for instance,
a switch to democracy leads to a large improvement in policies and hence incomes).
Figure 5 here
Figure 5 gives a graphical illustration of how social welfare relates to intensity of the sanc-
tions imposed. There are two examples, one with
1
1 (Panel a.) and the other with

1
< 1 <
2
(Panel b.). In both cases, as long as <
2
, social welfare decreases as the
sanctions become more intense (and even jumps down at
1
in situation a.). At
2
, social
welfare jumps up but turns again into decreasing function of beyond
2
. The spike in social
welfare at
2
occurs because at this point group 2 strictly prefers the third over the second
equilibrium (while group 1 is indierent). Finally, whether or not V(1,
2
) V(1, 1) depends
on the exact parameter constellations (see Proposition 2). Yet, this inequality is more likely
to hold if the parameter constellation implies a low
2
(as shown in panel b.).
5 Policy Perspective
The above analysis may oer a new perspective on the situations observed in Haiti and Iraq.
Through the lens of the present model, it appears that the imposed sanctions were too weak
to have a destabilizing eect but just sucient to take the two countries from a type-1 equi-
librium to a much worse equilibrium of the second type. Put dierently, the intensities were
insucient to fend o the defense strategy highlighted in the previous section: By scaling
20
back public services to an extent which clearly exceeded unavoidable adjustments, the two
regimes eventually managed to increase the private cost of revolutionary activity in a way that
countered the heightened revolutionary zeal in the populations. As a result, the rulers went
unchallenged but the ordinary citizens were punished twice, through both the direct eect of
the sanctions and the regimes calculated policy responses.
Obviously, from a policy perspective, the models main implication is that the intensity
of the coercive measures plays a central role: In order to promote regime change and de-
mocratization, the sanctions must be suciently severe; if the critical level is missed, even
only narrowly, there is nothing to show in return for the hardship inicted on the population
by the sanctions and the rulers cynical behavior. Thus, clearly, such sanctions should be
strictly avoided if the critical intensity cannot be achieved because, e.g., the available coercive
measures are too weak; because they are backed by too few countries; because they cannot
be eectively enforced. Moreover, closely related to this nding, the model implies that an
intermediate sanctions intensity may be the worst thing in terms of social welfare. Thus,
paradoxically, the present analysis highlights the possibility that diluting sanctions to spare
the general population may achieve just the opposite of what is intended.
The present analysis also points to a number of hitherto less observed factors which might
inuence the ability of economic sanctions to promote regime change and democratization. In
particular, such sanctions are more likely to work in economies which can be considered to
be more advanced, i.e., in autocracies where the states bureaucratic capacity is higher and
the private sector relies more heavily on modern technologies. In these regions, other things
equal, the sanctions intensity required to make the population challenge the regime is lower.
Moreover, more advanced economies tend to have more intense interactions with the outside
world, giving the latter more leeway to impose crippling coercive measures.
6 Conclusions
Economic sanctions aiming at regime change and democratization are frequently imposed,
sometimes very disruptive, but hardly ever successful. Given these facts, there is surprisingly
little research on how such sanctions work and therefore also little knowledge about why they
frequently fail. The present paper starts to ll this gap by analyzing the impact of sanctions in
a parsimonious model of nondemocratic politics. The main nding is that targeted regimes may
resort to a simple yet powerful defense strategy: By aggressively lowering the supply of public
services, they can render the citizens less productive and thus increase the strain associated with
21
engaging in costly revolutionary activity. So, in the light of the present analysis, it appears that
the regimes in Haiti and Iraq chose to deliberately amplify the sanctions disruptive eects in
order to stay in power. This amplication strategy, however, is less likely to work if the intensity
of the sanctions is high and therein lies the rub: In practice, agreeing on crippling sanctions
is very dicult because, among other things, such sanctions mean signicant hardship for
the aected population and also touch economic interests in the sender states. Thus, crippling
measures are likely to be watered down which may give rise to a most unsatisfactory situation:
The sanctions cannot attain their purpose but the citizens are punished twice, not only through
the direct eect but also via the regimes harmful policy responses. Obviously, there might be
many other factors behind the failure of past sanctions episodes. Thus, more research both
theoretical and empirical has to be done in order to get a more comprehensive view on the
potential and limitations of sanctions.
22
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24
Appendix
Proof of Lemma 1. Claim (i): Assume rst that contrary to what is stated in the lemma
there exists an MPE where t
|
< c and j
|
= 0 for all t. This assumption can easily be led to
a contradiction by looking at the two groups decision on whether or not to challenge the ruler
in a certain period t: Given that the assumed equilibrium strategies are applied in all future
periods t + 1, t + 2, , it must be the case that when deciding on j
I,|
at least one group is
better o by not challenging the ruler. Put dierently, it must be the case that condition (9)
holds for at least one group (with the equilibrium value of G on the LHS). Yet, condition (9)
does not depend on the current tax rate, t
|
. Thus, even if the ruler deviated and chose t
|
= c
in the rst step of the stage game (instead of setting t
|
equal to the equilibrium value), the
best response would still be to abstain from challenging the ruler. As a result, the ruler must
nd it optimal to choose t
|
= c (i.e., to implement the revenue-maximizing tax rate) which
contradicts the initial assumption. Note that assuming the existence of an MPE where as
long as o
|
= 1 we have t
|
< c and j
|
= 1 can be led to a contradiction in a similar way.
Claim (ii): It is obvious that due to the properties of the function 1 values of G other
than G
|
, G
n
, or G
l
cannot be chosen in an MPE. In order to rule out G
|
= G
|
, assume
that contrary to what is stated in the lemma there exists an MPE where G
|
= G
|
and
j
|
= 0 for all t. Again, this assumption can be led to a contradiction by looking at the citizens
decision on whether or not to challenge the ruler in a certain period t: As was the case above,
the assumptions about the MPE ensure that condition (9) holds for at least one group (with
G
|
= G
|
on the LHS). Yet, if the condition holds with G
|
= G
|
, it must also hold with
G
|
= G
n
. Thus, even if the ruler deviated and chose G
|
= G
n
in the rst step (instead of
setting G
|
equal to the equilibrium value G
|
), the best response would still be to abstain from
trying to oust the ruling elite. As a result, the ruler must nd it optimal to choose G
|
= G
n
(i.e., to implement the level which maximizes the budget surplus). But this contradicts the
initial assumption. Finally, note that assuming the existence of an MPE where as long as
o
|
= 1 we have G
|
= G
|
and j
|
= 1 can be led to a contradiction in a similar way.
Proof of Lemma 2. The rst derivative of with respect to 7 is given by
d
d7
=
"

1 ,
,j

7
7

(1o)/o1

(7 )
2
7 +

7
7

(1o)/o
#
(1 c)
1
|
G
|
+
.
Now, since c (0, 1) and 1
|
G
|
0 due to condition (4), it is easy to see that d,d7 < 0
is equivalent to 7 < c, whereas c = (1 ,(1 j)),(,j).
25
Proof of Proposition 2. Suppose that the sanctions intensity under dictatorship is given
by
2
which is exactly sucient to induce the type-3 equilibrium. Then, as long as o
|
= 1,
the value function of the representative member of group i {1, 2} is given by
\
I
( 1| =
2
) =
ln

(1 c)(
2
)
1
(1
l

) +,j\ (1)
1 ,(1 j)
.
Further, using (8) to substitute for \ (1) and rearranging terms eventually yields
\
I
( 1| =
2
) =
ln

(
2
)
1
(1 c)1
l

1 ,
+
ln

(1
l

I
),(1
l

1
)

1 ,(1 j)
. (A1)
On the other hand, in the absence of any sanctions, the value function would be given by
\
I
( 1| = 1) =
ln

(1 c)1

1 ,
,
whereas , = : if
1
1 (and , = | otherwise). Taking the dierence results then in
\
I
(1| =
2
) \
I
(1| = 1) =
ln
h

(1
l

I
),(1
l

1
)

1o

1
l
,(1

2
)

1o(1)
i
(1 ,(1 j))(1 ,)
.
Finally, note that the dierence in social welfare, V(1,
2
) V(1, 1), can be written as
1
2
[\
1
( 1| =
2
) \
1
(1| = 1)] +
1
2
[\
1
(1| =
2
) \
1
(1| = 1)] ,
from which the expression in the proposition immediately follows.
26
F
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g
u
r
e
s




F
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1

T
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p
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g
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F
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p r o b . d e m o c r a t i z a t i o n ( p . p e r i o d )
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1

F
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