Monday, July 18, 2022

Fighting Communism Supporting Collusion

We develop a simple model to explain why a powerful importer country like the United States may provide political support for international collusive agreements concerning certain commodities (e.g., coffee). This behavior raises questions due to the fact that an importer country should have strong economic incentives to avoid the cartelization of its suppliers. We show that an importer country sometimes helps producer countries organize and enforce collusion to advance important geopolitical goals, e.g., by reducing the chances that the producer countries will align with a rival global power (e.g., the Soviet Union). Moreover, using this practice, a powerful importer country can immediately share the cost of collusion with other importers (including allies). Thus, a powerful importer country may see collusion as a superior strategy to foreign aid (a priori a more direct and efficient instrument), which is riddled with free riding problems. The model sheds light on why the United States supported (or failed to support) international commodity agreements for coffee, sugar, and oil during and immediately after the Cold War period.

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