A Three-Party Game of Institutional Resilience versus ...iea-world.org/wp-content/uploads/2017/07/Jiahua... · Introduction Background of this paper Masahiko Aoki, Stanford University

A Three-Party Game ofInstitutional Resilience versus Transition

A Model and Comparative History of China-Japan Revisited

Masahiko Aoki, Stanford UniversityJiahua Che, Fudan University

Masaki Nakabayashi, University of Tokyo

July 1, 2017

Masahiko Aoki, Stanford University Jiahua Che, Fudan University Masaki Nakabayashi, University of TokyoA Three-Party Game of Institutional Resilience versus Transition A Model and Comparative History of China-Japan RevisitedJuly 1, 2017 1 / 38

Introduction

Background of this paper


Introduction


Introduction

Aoki (2001): institution as a self-sustained system of shared beliefs abouthow the game is played

I Dispute resolution mechanism is a key ingredient for any institution

I When shared beliefs break down, major disputes naturally emerge

, andwhen shared beliefs about dispute resolution mechanism also collapse

Conflict (oftentimes) becomes a natural companion of majorinstitutional transformation


Introduction



I When shared beliefs break down, major disputes naturally emerge, andwhen shared beliefs about dispute resolution mechanism also collapse



Introduction



I When shared beliefs break down, major disputes naturally emerge, andwhen shared beliefs about dispute resolution mechanism also collapse



Introduction

The Question

I Why some institutional transition went about successfully, and whysome transitions seemingly went bad?

I Among many other examples, Meiji Restoration in Japan v.s. XinhaiRevolution in China


Introduction

The Question

I Why some institutional transition went about successfully, and whysome transitions seemingly went bad?

I Among many other examples, Meiji Restoration in Japan v.s. XinhaiRevolution in China


Introduction

Japan v.s China

I Landmark transitionsI Old long-lasting political institution abandoned

I Japan: Office of military general (Shogunate) abolishedI China: Thousands years of monarchy came to an end


Introduction

Japan v.s China

I Similarity right before transition

I Both countries faced external challenged to their sovereignty, togetherwith domestic political instability as a result of weakened sovereignty

I Both countries had a political institution with diversified political powerI Japan: Office of Military General (Shogunate) - federation of hansI China: monarchy with the rise of gentry (partly in response to domestic

instability)


Introduction

Japan v.s China

I Similarity right before transition

I Both countries faced external challenged to their sovereignty, togetherwith domestic political instability as a result of weakened sovereignty

I Both countries had a political institution with diversified political powerI Japan: Office of Military General (Shogunate) - federation of hansI China: monarchy with the rise of gentry (partly in response to domestic

instability)


Introduction

Japan v.s China

I Divergence after transition

I Japan: a broad and far-reaching set of reforms implemented one afteranother, except for a 6 month major samurai rebellion, domesticenvironment remain by and large peaceful; at the end of the transitionemerged oligarchy by a coalition of major hans; quickly rising tochallenge China and Russia

I China: continuous power change and prolonged domestic conflicts, withsome reforms implemented, economic development restricted in pocketsof urban areas with weak sovereign power, while vast rural areas leftbehind, not able to defend against Japanese invasion; at the end of thetransition emerged a single party monopoly of power


Introduction

Three-Party Game

I Three-party model to explain post-transition divergence afteroverthrowing the old guard

, as well as pre-transition resilience

I Nation may plunge into prolonged conflicts after transition triggered bya sovereignty crisis if nation began with

I weak state capacityI large political differences among political forces that share the agenda of

overthrowing the old guard

I The eventual institution emerging after prolonged conflicts tends tofeature a more concentrated political structure

I Beyond China and Japan:I Glorious revolution, French revolution, Russian revolution, ...


Introduction

Three-Party Game

I Three-party model to explain post-transition divergence afteroverthrowing the old guard, as well as pre-transition resilience







Introduction

Three-Party Game

I Three-party model to explain post-transition divergence afteroverthrowing the old guard, as well as pre-transition resilience







Model

The model: state capacity, political differences, conflicts, and sovereigntycrisis


Model

State Capacity

I Economy (infinite period) with three political forces:

R,A,B

I Each may have some state capacity in period t: sR(t), sA(t), sB(t)

I ability to mobilise and organise resources, in particular human resources(by their allegiance)

I can translate into ability to, e.g., raise tax or to engage in a conflict(“conflict management capacity” per Aoki).

sR(t) + sA(t) + sB(t) = s(t) ≤ 1

I s(t): total existing state capacity in the economy at period t


Model

State Capacity


R,A,B




sR(t) + sA(t) + sB(t) = s(t) ≤ 1



Model

State Capacity


R,A,B




sR(t) + sA(t) + sB(t) = s(t) ≤ 1



Model

State Capacity


R,A,B




sR(t) + sA(t) + sB(t) = s(t) ≤ 1



Model

Status Quo

I The economy begins with:

sR(0) : sA(0) : sB(0) = r : a : b

1

2> r > max{b, a}

I R being the status quo ruler

I Status quo ruler R cannot credibly share its government with others

I Identities of A and B hidden until one is involved in challenge against R


Model

Status Quo


sR(0) : sA(0) : sB(0) = r : a : b

1

2> r > max{b, a}





Model

Status Quo


sR(0) : sA(0) : sB(0) = r : a : b

1

2> r > max{b, a}





Model

Political Difference

I Three political forces also differ in preferences for public goods

I i : political distance between A and B,I IA: political distance between A and R, IB between B and R


Model



I i : political distance between A and B,

I IA: political distance between A and R, IB between B and R


Model



I i : political distance between A and B,I IA: political distance between A and R, IB between B and R


Model

Conflict

I If period t begins with status quo:

I Conflict takes place if A challenge R, followed by B (beingopportunistic) choosing whether

to side with R, orto side with A, orto stay neutral (and identity remaining hidden)

I Otherwise, peace prevails and the status quo maintains

I If conflict, the side with larger sum of state capacity wins withprobability one


Model

Conflict







Model

Conflict







Model

Conflict







Model

Conflict

I A political force becomes forever defunct if lose in a conflict

I After conflict in period t, either

A + B (because B sides with A), orR + B (because B sides with R), orR with hidden B (because B stays neutral)

I The winning side gets loser’ state capacity and acquire α portion of1− s(t): state capacity consolidation and expansion

I Members of the winning side (A + B or R + B) share the new totalstock of state capacity:

I a member obtains a larger share with probability equal to its relativestrength in status quo state capacity

I e.g., ba+b

for B in the A + B coalition.


Model

Conflict







I e.g., ba+b



Model

Conflict







I e.g., ba+b



Model

Conflict







I e.g., ba+b



Model

Conflict

I After new state capacity profile determined, the winning side decideswhether conflict again or peace

I If peace, joint government feasible if A + B,

I Choice of public goods: member with larger state capacity makes atake-it-or-leave-it offer, if rejected, the two head to a conflict

I Joint government not feasible if R + B or R with hidden B

(R cannot credibly share its government)


Model

Conflict







Model

Conflict







Model

Payoffs

I State capacity of the government and political difference determinespolitical forces’ payoffs during peace

u(t) = (1− z)βsg (t)

β: productivityz ∈ {i , IA, IB}: political differencesg (t) : total state capacities of political forces involved in thegovernment at t

I Zero payoff during conflict


Analysis

Analysis

I B’s decision after A challenges R

I A’s decision while anticipating B’s decision

I Institutional resilience: in what kinds of economies the status quowould have survived in equilibrium

I Sovereignty shock


Analysis

B’s choice if A challenges R

s2

i

1

(a+b)IB/a

subsequent conflict

s1

B sides with Rsubsequent peace

B sides with AB sides with A

B sides with Rsubsequent

peace or conflict

subsequent peacesubsequent peace

B sides with A

iB

r(a+b)IB/a(r+b)

Figure: under condition (1)


Analysis

Intuition

I Conflict consolidates and expands state capacity, but with “diminishingreturn to scale”:

I the larger the total existing state capacity, the smaller the state capacityslackness (1− s(t)) to gain from through conflict

I By dictating choice of public goods, dominant party can enjoy peacewithout suffering from political difference; hence s1, s2 independent of i

I If dominant in B + R, B suffer from political difference for not beingable to share government with R; hence s2 > s1.


Analysis

Intuition






Analysis

Intuition






Analysis

Intuition






Analysis

Intuition

I For s(t) > s1, remaining neutral is dominated by siding with A as moreconsolidation of state capacity and having a chance to dominate thefuture joint government

I B sides with R dominates siding with A if i is too big.


Analysis

B’s choice if A challenges R at t

I Suppose that s(t) ≤ s1. Then B will side with A provided that thefollowing holds

b

a + bδ(1− α) > 1− IB (1)

Intuition

I For s(t) ≤ s1, siding with R is dominated by siding with A as sidingwith A having a chance to dominate the future joint government

I Staying neutral is to be followed by peace, siding with A is to befollowed by another conflict;

I The expected return of additional conflict to B increases in the relativestrength of B; whereas the cost of staying neutral (with theconsequence of giving R the victory) is increasing in IB


Analysis



b

a + bδ(1− α) > 1− IB (1)

Intuition





Analysis



b

a + bδ(1− α) > 1− IB (1)

Intuition





Analysis

Equilibrium Outcomes: A’s Choices

s2

i

1

(a+b)IB/a

subsequent conflict

s1




peace or conflict


B sides with A

Peace following Conflict

iA

Conflict following Conflict iB

Status Quo

Figure: conditions (1) and (2)


Analysis

Equilibrium Outcomes: A’s Choices

I Suppose that s(t) ∈ (s1, 1]. Then there exists iA such that1. A will not challenge R will remain for s(t) ∈ (min{iB , iA}, 1].2. A joined by B, will challenge R for i ≤ min{iB , iA}.

I Suppose that s(t) ∈ [0, s1]. Expecting B’s support, A will challenge Rprovided the following condition holds:

a

a + b≥ (1− IA)r . (2)


Analysis

Sovereignty shock: three possible interpretations

I crumbling authority of the ruler

I changing political differences

I productivity shock


Analysis

Crumbling of the Status Quo Ruler’s Authority under Sovereignty Crisis

I Sovereignty crisis causes r to drop


Analysis

Sovereignty Crisis: Crumbling Authority

s2

i

1

(a+b)IB/a

subsequent conflict

s1




peace or conflict


B sides with A

iB


iA

Conflict following Conflict

iAN Japan

Status Quo

iBN


Analysis

Changing political differences under Sovereignty Crisis

I Sovereignty crisis causes IA and IB to increase, while i to shrink


Analysis

Sovereignty Crisis: Changing political differences

s2

i

1

(a+b)IB/a

subsequent conflict

s1




peace or conflict


subsequent peace

B stays neutral

B sides with A


iA


iANJapan

Status QuoiBN

iB


Analysis

Sovereignty Crisis as Productivity Shock

I β′ > β if s(t) > s

I β otherwise

I s1: s(t) such that after one period of conflict, s(t + 1) = s;

I s2: s(t) such that after two periods of conflicts, s(t + 2) = s


Analysis



I β otherwise




Analysis



I β otherwise




Analysis

Sovereignty Crisis: Before

s2

i

1

(a+b)IB/a

subsequent conflict

s1




peace or conflict


B sides with A


iA

Conflict following Conflict iB

Status Quo


Analysis

Sovereignty Crisis: Productivity Shock

s2

i

1

(a+b)IB/a

subsequent conflict

s1




peace or conflict


B sides with A

i*

s1 s

iAN



iA

s1N

China

Japan

i*

iBN

Status Quo

s2


A Historical Narrative

The Historical Narrative



Japan v.s. China: through the lens of Three-Party Game

I Japan: two major political forces joint hands to end the ShogunateI War (Boshin war) with major hans (Choshu and Satsuma, together with

Tosa) against the office of military general (Shogunate)I Followed by (almost) peace afterwards and an eventual oligarchy

involving Choshu and Satsuma and Tosa coalition

I China: uprising by a large contingent of different political factionsended the Chinese monarchy

I Followed by prolonged conflicts among these forces, including theNationalist and later the Communist, eventual political monopoly




I Meiji Restoration

I Smaller political differences among key players, perhaps along with amaintained institutional ability to resolve differences

Apparent inefficiency + external factors + past separation of monarchyand administration

I Stronger state capacity even during Tokugawa (the last military generalfamily), initial conflict (Boshin War) + land reform helped furtherstrengthen state capacity




I Xinhai Revolution

I Greater political difference among key players, also lacked aninstitutional ability to resolve differences

Historical path with greater choice set + weak talent mechanism +sudden collapse of the monarchy + lacked tradition of consultation anddiscussion

I Weak state capacity, only to be strengthened through prolonged turmoils

No apparent Japan-type inefficiency (markets were there) + symbolicconsolidation by compromise during Norther expedition withoutchanging warlord structure



China Afterthoughts: Why Took Conflicts

I The paramount priority was perhaps to strengthen to defendsovereignty

I Repeated transgressions on sovereignty, with much more advancedtechnologies, in a vicious, seemingly unstoppable, fashion

I Arguably, the only answer to deal with repeated transgression with muchmore advanced technologies lies in China’s “comparative advantage” inwarfare: population

I Thus came the need to reach to the populace, mostly in vast rural areasof China, mobilize and organize them to facilitate the functions of thestate

I Difficult, if not impossible, to buy out oppositions without firststrengthening the state capacity

I The period of prolonged conflicts testified how different political forcesin China raced against each other towards this national agenda

I Eventually a political monopoly with a deep-down apparatus thatenabled central planning


A Tribute to Prof. Aoki

Masa, We Miss You….


Documents

A Three-Party Game of Institutional Resilience versus ...iea-world.org/wp-content/uploads/2017/07/Jiahua... · Introduction Background of this paper Masahiko Aoki, Stanford University