Rewarding Impatience: A Bargaining and Enforcement Model of OPEC

Abstract

In this article, I make two primary contributions to the literature on international cooperation. First, I present a simple version of Fearon s bargaining and enforcement model and show that impatience (as captured in the discount factor) can be a source of bargaining strength when the outcome of the bargaining phase is followed by an enforcement phase that resembles a prisoners dilemma. Second, I illustrate how to apply this model to the question of the division of cartel profits within the Organization of Petroleum Exporting Countries (OPEC), particularly with regard to the relationship between bargaining strength and disparate time horizons. I find that for some critical threshold level, states that discount the future more heavily tend to receive better oil production offers than those that do not. I examine empirical evidence that suggests that countries in OPEC fall into the range where this proposition holds; in other words, relatively poor, populous countries and relatively unstable ones are allowed by OPEC to overproduce.I am grateful to Christino Arroyo, Jim DeNardo, Joe Gochal, James Honaker, Shuhei Kurizaki, Drew Linzer, Barry O Neill, Art Stein, Hiroki Takeuchi, George Tsebelis, Jana von Stein, and two anonymous referees for helpful comments. I am especially indebted to Ken Schultz for his advice and to Randy Calvert for a helpful discussion during the 2003 EITM Summer Institute at Washington University in St. Louis.