Abstract
How does the prospect of accession to an international union affect a non-member-state government’s incentives to implement political and economic liberalization reforms? To answer this question, we propose an informational mechanism of international union accession conditionality drawing on Bénabou and Tirole’s (The Review of Economic Studies, 70, 489–520, 2003) formalization of intrinsic and extrinsic motivation. In a Bayesian game of union accession between a supranational principal (e.g., EU Commission) and a national agent (e.g., the government of the target country), we find that the extrinsic bonus of post-accession transfers may on the one hand reinforce the agent’s short-term incentives to meet the accession criteria but on the other hand can also “crowd out” its intrinsic motivation to liberalize and comply with the union’s acquis in the long run. As a result, we expect that (i) net-recipient countries’ post-accession pace of reform may decline or even turn negative over time (temporal effect), (ii) the crowding-out effect will be stronger for countries that enjoy higher levels of distributive net transfers and those that go through a lengthier negotiation period (spatial effect), and (iii) early liberalizers are ex ante more likely to be officially selected as union candidate members, accept the accession contract, and implement the required reforms. We illustrate the theoretical mechanism and dynamics of the model with anecdotal evidence from two paired comparisons in respect to the effects of economic conditionality attached to EMU accession (Greece vs. Spain) and political conditionality attached to EU accession (Hungary vs. Estonia).
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Notes
In that regard, moral hazard (that occurs when the agent’s effort is not observable) and adverse selection (that occurs when the agent’s type is not observable) constitute the main potential sources of informational inefficiency.
See Schneider and Cederman (1994) for an early application of asymmetric information models to the study of European integration.
Note that we borrow this nomenclature from economic models of individual behavior (Bénabou and Tirole 2003; Kreps 1997). In one such contribution, Bénabou and Tirole (2003) provide a game-theoretic formalization of the concepts of intrinsic and extrinsic motivation, tease out the mechanisms that reinforce one or the other in the context of strategic signaling games, and define conditions under which extrinsic incentives can harm performance.
The mechanism described here bears eerie resemblance to the academic tenure problem. The stricter the criteria for tenure, the more confident the department can be in its selection of the best people (adverse selection) and, yet, the higher the probability of a post-tenure slump in effort (moral hazard).
In fact, this assumption clashes with important findings in cognitive social psychology, according to which incentives do not necessarily promote effort and performance and may even turn out to be “negative reinforcers” in the long run (Deci et al. 1999). This crowding-out cognitive effect on motivation has been well established in economic theory (see, e.g., Bénabou and Tirole 2003; Kreps 1997) and amply corroborated in behavioral and experimental economics (Gneezy and Rustichini 2000).
We thank an anonymous referee for this interpretation of the crowding-out effect.
Interestingly enough, one branch of that literature finds that accession did not actually affect the compliance behavior of Central and Eastern European countries (CEECs). Levitz and Pop-Eleches (2010) for example argue that new EU member states experienced at most a slowdown in reforms rather than a genuine backlash. Hence, the power of external incentives may not be as consequential as theoretically predicted (Sedelmeier 2008).
See Khemani (2017) for a comprehensive survey of that literature.
Note that economic (macroeconomic and structural) and political (pro-democracy) reforms ri,t can also take negative values, i.e., they can move in an opposite direction to that desired by the designer organization in terms of policy retraction, democratic backsliding, import substitution, weak regulation of monopolies, and other distortionary and protectionist measures.
In that sense, we abstract away from the distributive considerations of enlargement negotiations (Schneider 2009). In accordance with Bénabou and Tirole’s (2003) terminology, we focus on the trust effect of the principal’s offer on the agent’s motivation and we ignore the so-called profitability effect that would arise if the principal’s gains from the agent’s actions were also conditional on the latter’s type, i.e., \(W\left (l_{i,t};\alpha _{i}\right )\). On the other hand, the distributive profitability effect can explain why enlargement rounds happen in waves as the accession of multiple countries at a time helps achieve consensus amongst existing member states (Konstantinidis 2015).
In other words, our notion of a principal in this context is that of a neutral supranational actor, e.g., the European Commission, with a strong political mandate to negotiate on behalf of existing member states. In that sense, we abstract away from the domestic political considerations of current member states with respect to EU accession conditionality. While member states have to unanimously agree which countries can gain candidate member status, it is up to the Commission to conduct the accession negotiations with those countries with the aim of maximizing the probability of smooth completion whilst safeguarding the sanctity of the acquis. Franchino (2007) explains well that the Europeanization of a policy serves the interests of a big country because of the spillover benefits of liberalization reforms, the political and economic rationale of policy harmonization, and the elimination of “beggar-thy-neighbor” effects.
We index the existing body of rules, standards, and regulations A by time t because we assume that the acquis deepens over time in the direction of further liberalization. Although we do not examine the endogenous formation of the acquis in this model – focusing on the role of the supranational principal as the guardian of existing rules, not the agenda-setter –, the future accession of second-period candidate members often lurks in the background of policy negotiations among existing union members (Konstantinidis 2008, 2015).
Note that we do not index the cost and benefit variables by time as we interpret them as the average net present value of a perpetuity of annual payments.
Another argument against the potential ex post opportunism of the principal is the concept of “rhetorical entrapment” that locks in existing member states’ avowed commitment to enlargement (Schimmelfennig 2001).
Note that the signal distribution function is indexed by the identity of the recipient government g in country i and period t, which implies that the incumbent’s ideological orientation may also introduce some bias in how it perceives its country’s true competitiveness level and hence the true desirability of liberalization reforms.
See Online Appendix A for a formal exposition of the so-called Monotone Likelihood Ratio Property (MLRP).
The justification for this information structure seems quite straightforward in the context of the European Union, where supranational actors (e.g., the European Commission or the European Central Bank) are endowed with the accumulated experience and necessary technical wherewithal to be able to estimate any member or non-member country’s economic standing within the overall economic space under their purview. Therefore, while the accumulation of knowledge takes place horizontally between existing member states, the dissemination (diffusion) of information takes place vertically from a supranational principal to a national agent. By contrast, Genovese and Schneider (2020) in this special issue analyze a different information structure in the context of the Eurozone debt crisis whereby national parliaments increased their scrutiny of supranational institutions pushing for austerity.
Admittedly, this single “take-it-or-leave-it” offer on behalf of the principal abstracts away from the bargaining complexities of the accession negotiation process and yet seems rather plausible in light of the uneven bargaining leverage between member states and candidate members in EU enlargement negotiations. Moreover, it allows us to focus on the contractual aspects of conditionality.
Based on the counterfactual definition provided above, the degree of ownership would be inversely related to the absolute difference between the agent’s autarchic reservation utility in the absence of a union accession contract and its intrinsic utility of implementing the acquis without enjoying the extrinsic perks of membership, i.e, \(\left |{u^{g}_{1}}\left (A_{1},0;p_{i}, E\left (\alpha _{i,1}|\sigma _{i,1}^{g},p_{i},\alpha _{i,0}\right )\right )-{u^{g}_{1}}\left (\widetilde {l}_{i,1},0;0,E\left (\alpha _{i,1}|\sigma _{i,1}^{g},\alpha _{i,0}\right )\right )\right |\).
Depending on the set of parameters \(\left (B_{i},b_{i}\right )\), it may be the case that in equilibrium a semi-pooled conditional accession contract could be coupled with negative budgetary transfers (i.e., \(p_{i}^{j\ast }<0\)) for a set of true competitiveness types that are less than \(\widetilde {\alpha }_{i,1}\) but still high enough to be willing to implement the acquis set of reforms in the absence of any distributive transfers, i.e., \({V^{g}_{i}}\left (A_{1};\alpha _{i,1}\right ) - {K^{g}_{i}}\left (A_{1}\right ) + B_{i} \geq {V^{g}_{i}}\left (\widetilde {l}_{i,1};\alpha _{i,1}\right ) - {K^{g}_{i}}\left (\widetilde {l}_{i,1}\right )\).
See for example the EU’s Stabilization and Association Process, its European Neighborhood Policy, and its policy conditionality in South Eastern Europe in return for visa-free travel (Trauner 2009).
Hence, the interval \(\left [-B_{i},b_{i}\right ]\) delimits the range of incentive-compatible high-powered incentive schemes or else the union’s absorption capacity. Arguably, in the case of the EU, the shrinking size of this interval over time has been the main cause of its so-called “enlargement fatigue”.
See, e.g., Alt et al. (2014) for an analysis of moral hazard in the context of the EMU.
See Figure B.1 (taken from Böhmelt and Freyburg 2013) in Online Appendix B for an empirical illustration of how this “ kink” (reversal) effect kicks in once accession has been locked in.
Among others, Plümper, Schneider, and Tröger (2006) examine the strategic differences in the logic of the application and the accession stages respectively, while Marchesi and Thomas (1999) model IMF programs as screening devices that enable creditors to discriminate between good and bad debtors.
In this regard, the potential accession of new members very much influences the deepening of the union’s scope of policies and areas of competence. While Gilligan (2004) argues that the assumption that club members must set policies at an identical uniform level (acquis) implies a broader-deeper trade-off in multilateral cooperation, Konstantinidis (2015) shows that the enlargement of a union and the widening of its policy scope can be two complementary and mutually reinforcing dynamic processes under certain conditions.
Erce et al. (2020) in this special issue show how during the financial crisis Eurozone loans were given with longer maturities and lower rates than IMF ones, which would imply that the design of Eurozone rescue packages was less influenced by considerations of moral hazard.
The so-called Copenhagen criteria stipulated that membership would require (a) stability of institutions guaranteeing democracy, the rule of law, and human rights, (b) the existence of a functioning market economy, and (c) the ability to take on the obligations of membership, including adherence to the aims of political, economic, and monetary union.
Eurostat data actually suggests that Hungary has received lower budgetary transfers than Estonia both in per capita terms and as a percentage of GDP over time. However, this does not necessarily constitute disconfirming evidence against Hypothesis 2 as the liberalization starting point was different for the two countries and the ceteris paribus assumption does not hold.
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Acknowledgments
This research has been partially funded by the Ministry of Economy, Industry, and Competitiveness, Government of Spain (Grant No. CSO2015-70072-P). We would also like to thank participants at the Barcelona Workshop on Global Governance, the Centre for Commercial Law Studies (CCLS) of Queen Mary, University of London, the European Bank for Reconstruction and Development Research Seminar, the Annual Meeting of the Political Studies Association in Cardiff, UK, the University of Sao Paulo Workshop on Compliance in International Relations, and the 6th Annual Conference on the Political Economy of International Organizations (PEIO) in Mannheim, Germany, for their valuable comments on different iterations of this paper.
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Konstantinidis, N., Karagiannis, Y. Intrinsic vs. extrinsic incentives for reform: An informational mechanism of E(M)U conditionality. Rev Int Organ 15, 601–632 (2020). https://doi.org/10.1007/s11558-020-09387-w
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DOI: https://doi.org/10.1007/s11558-020-09387-w