Thursday, October 4, 2007

Weller: Bonding for Investment

Nicholas Weller (Univ. of California, San Diego - Political Science) has posted Bonding for Investment. Here's the abstract:
Previous scholars have argued that international treaties can increase investment by serving as a bond to clarify rules regarding investment, but the empirical literature often fails to find an effect of treaties on investment. In this paper I develop a formal model of bonding and investment, and use an experiment to test the model's internal validity. In the experiment subjects choose how much to invest in another person who has made a prior decision about whether or not to purchase a bond. I find that the option to purchase a bond has multiple effects on investment. First, players purchasing a bond can induce greater investment, but only if the bond is large. Second, if the second actor does not purchase a bond there is a significant decrease in investment relative to the control condition. Third, the first player is more likely to behave consistent with game theoretic equilibrium as the size of the bond increases. One implication of these results is that the inability to find empirical evidence for international treaties' effectiveness may occur because many treaties do not impose bonding costs that are sufficient to induce greater investment.