Dawid Jarosz | University of Warwick

Economic Tools in International Negotiations

In the first stage of this PhD research project I conduct two statistical studies to measure the effectiveness of sanctions by examining the 2014 Russia sanctions episode. I employ the statistical method of event study to determine whether financial sanctions targeting companies have any negative impact on their market valuation. I use regression analysis with time series data to test whether sanctions affect the Russian financial market and to test the theory that a threat about sanctions has more severe impact on stock market indexes than the actual imposition of restrictive measures. I employ Google search engine data to identify the moment of threat precisely and to account for signal proxy. I control for the price of oil, the value of the ruble and historical events. To date, I have identified a phenomenon called the Latent Sanctions Effect – a reaction to the threat of sanctions imposition and found that signal proxy has significant explanatory power for the shocks on the Russian stock exchange. 

The second stage of my PhD research project will result in two main products. Until now, scholarship assumed that negotiation processes which use economic tools such as sanctions, and which result in compliance after the threat stage result in compliance because of the inevitability of the punishment, while attaching no costs to the threat itself. My initial findings point to a different possibility. I will test the hypothesis that a threat going public might possibly decrease the chances of early stage compliance because of the costs attached to the threat (1). To do that I propose a large sample size statistical study of negotiation processes, which involved a public threat and were concluded after that stage, which will be the first product of the second stage of this dissertation.

If my theoretical deliberations are confirmed, we might be facing a mismatch between the threat as a tool and expectations attached to it. When a political agent uses a threat, hoping it will increase the chances of the other side complying, and he does it in such a way that the costs, which should come after the threat, are in fact already imposed on the other actor, then the consequences of the threat will not match his expectations.  Thus the second product will be a game theoretical model of international negotiations involving the use of economic tools, with the emphasis on the threat stage of negotiation.

These findings might also point to the introduction of a system of classification for economic tools, which aim to smooth the market reaction to certain political steps. This classification system would indicate which tools could be successful in particular political circumstances.  This, as a consequence, might serve as a step towards decreasing the mismatch between the tool and its expected effect on the political side, and towards a more balanced reaction on the market side. This aggregate effect might increase the chances of a positive conclusion to the negotiation process.

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(1) Only a threat kept inside the negotiation room fulfils the classic purpose of a threat according to Schelling’s understanding of the term Schelling claims that for the threat to be effective, the pain from the possible sanction must be avoidable by compliance. SCHELLING, T. C. 1976. Arms and influence, New Haven ; London, Yale Univ. Press.