Michael Porcellacchia

mporcellacchia@gmail.com

PostDoc at Kiel Institute since September 2022

Econ PhD in 2022 from Northwestern University

Areas of Expertise:

Political Economy

Conflict, Historical Political Economy, Geopolitics

Applied Theory

Game Theory, Bargaining, Contract Theory

Spheres of Influence (with Matteo Camboni)

The rise of China's foreign influence is raising concerns about the potential return to a world shaped by geopolitical considerations. But what would such a world look like? This paper proposes and tests a theory where countries make optimal foreign policy decisions to manage the foreign influence of the great powers (say the US and China). First, we show that countries will optimally self-organize into spheres of influence (SOI), choosing foreign policies that are either biased in favor of the US or China. Second, we show that the extent of such biases depends on the balance of power between GPs. In particular, such biases increase when there is a rising power catching up with an established one, implying that SOI should become more visible in times of geopolitical competition. Finally, we demonstrate the empirical relevance of the analysis by introducing a new measure for the extent of bilateral cooperation between 1979 and 2013. The model correctly predicts how countries adjusted their foreign policies in response to the fall of the Soviet Union and China's rise.

Favoritism, Social Stratification, and Internal Conflicts (with Matteo Camboni)

Motivated by both contemporary and historical evidence, we develop a model for studying optimal taxation, ruler selection, and internal conflicts in (ethnically-)divided societies. We show that the political environment generates social stratification, reinforces inequality, and fuels internal conflicts. First, we show that the ruler optimally creates a ranking among social groups and demands lower taxes from higher ranks. This divide-and-conquer strategy (political favoritism) creates social stratification even among identical social groups and reinforces inequality by assigning higher ranks (thus lower taxes) to wealthier/stronger groups. Second, we show that the ruler's extractive capacity increases in society's fractionalization and the ruler's power. Nevertheless, social groups select the strongest group as the ruler to minimize their tax burden. Finally, we show that these political considerations generate a novel class of conflicts, status conflicts, where resource appropriation/destruction aims at climbing society's ranking, thus obtaining a more favorable fiscal treatment or even the rulership.

Monitoring Team Members: Information Waste and the Transparency Trap (with Matteo Camboni)

We study a moral hazard problem where a firm incentivizes a team of complementary workers using an incentive scheme based on individual and team performance measures. Our analysis reveals that firms' concerns about low trust among teammates can justify three otherwise puzzling practices: information waste, targeted monitoring, and a self-promotion trap. First, we show that firms primarily use individual-performance bonuses, ignoring relevant information about team output. Second, we demonstrate that firms monitor some workers more closely than others, even when workers are ex-ante homogeneous. Finally, we show that workers optimally engage in a self-defeating race toward higher effort transparency; this results in the firm obtaining the same high payoffs as in the firm-preferred equilibrium (i.e., absent trust concerns) at their expense. The key novel trade-off driving our results is the one between the classical information rents of moral hazard problems and the strategic insurance rents that arise from trust concerns.

Escaping Thucydides' Trap: The Geography of Hot and Cold War (with Matteo Camboni)

Will China's Rise lead to a new cold war with the US or even a hot one? Our paper suggests that while tensions will rise, they are likely to fall short of an all-out war. We document two new stylized facts. Two great powers (GPs) reaching similar capabilities usually become rivals. But they are unlikely to go to war when their spheres of influence (SoI), i.e., the set of countries where the GP is stronger than its competitor, are sufficiently far apart. We rationalize these facts by studying arms races and conflicts in a model where two GPs compete for alignment from the other countries. We first show that a GP's payoff jumps up when it expands its SoI. Thus, similarity triggers rivalries: two GPs with sufficiently similar powers will engage in a race to expand their SoI. Second, we show that the payoff that a GP obtains from the countries in its SoI decreases when its competitor becomes weaker. Thus, geography can act as a buffer: turning a cold war into a hot war is unprofitable when the size of each GP's SoI is not too responsive to the competitor's power (e.g., they are far apart).

Alliance Politics and Peace: Deterrence, Strategic Ambiguity, and Geopolitical Competition (with Lorenzo Stanca)

This paper studies how the stability of the international system is affected by alliance politics, i.e., the great powers' conflicting objectives of expanding their network of alliances. We assume that great powers can offer different degrees of commitment, from an explicit security commitment, like the US with NATO countries, to an ambiguous stance, like the US with Taiwan. Explicit guarantees have a direct deterrent effect on any potential threat to an ally, however, they expose the protector to moral hazard. We show that with only one protector and ambiguity-averse players, the unique equilibrium requires the protector to offer a fully ambiguous commitment. However, with multiple potential protectors, alliance politics pushes them to offer increasingly more explicit security commitments, even if abandoning ambiguity increases the chances of war. We argue that this logic can be applied to understand the US policy towards Taiwan, the proliferation of security commitments in periods of intense geopolitical competition, and what this mean for international stability.

How Power Matters: The Weaker Powers Index (with Matteo Camboni)

Periods of geopolitical competition are characterized by two or more great powers (GPs) racing to increase their power-projection capabilities, revealing a link between the global or regional distribution of power and their payoffs. But what aspect of the distribution of power matters for a GP? The prevalent view in international relations focuses on a GP's power share, whereas another view highlights the importance of a GP's power rank. This paper argues for a third option emerging from a model where GPs obtain their payoff from how other countries treat them. In particular, we show that the payoff that a GP obtains from its international interactions is increasing in a simple function of the distribution of power that we call Weaker Powers Index (WPI), i.e., the share of power of all weaker GPs. We test the theory using data on trade, diplomatic exchanges, aid, alignment, and more. In all dimensions, we show that a country benefits from a higher WPI, but not a higher power share or power rank. Finally, we discuss how our WPI-theory offers a re-interpretation of some well-known patterns in international relations, including Thucydides' Trap, status consciousness, arms races, and hegemonic stability.