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Erik Madsen is an Assistant Professor in the Department of Economics at New York University.
TOPIC: "Competing Powers"
ABSTRACT: Motivated by the growing interest in geoeconomics, we develop a formal framework in which multiple superpowers—such as the United States and China—compete to shape the behavior of less powerful countries or firms. We model superpowers as competing principals who influence an agent’s policy choice by threatening costly punishments. We characterize the set of equilibrium policy choices as a system of incentive-compatibility constraints on each actor. Equilibrium policy choices tend to favor more powerful principals, and larger policy concessions can be extracted when principals are more aligned. When all parties additionally have access to frictionless transfers, Coasian surplus-maximizing equilibria always exist regardless of the distribution of punishment power, with power impacting only the division of surplus. However, this result no longer holds if frictions are introduced.