A Three-Party Game of Institutional Resilience Versus Transition A

A Three-Party Game of Institutional Resilience versus Transition

A Model and Comparative History of China-Japan Revisited

Masahiko Aoki, Stanford University Jiahua Che, Fudan University Masaki Nakabayashi, University of Tokyo

July 1, 2017

Background of this paper

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A Model andJuly 1, 2017 Comparative 3 / 38 History of China-Japan Revisited , and when shared beliefs about dispute resolution mechanism also collapse

Conﬂict (oftentimes) becomes a natural companion of major institutional transformation

Introduction

Aoki (2001): institution as a self-sustained system of shared beliefs about how the game is played

I Dispute resolution mechanism is a key ingredient for any institution

I When shared beliefs break down, major disputes naturally emerge

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A Model andJuly 1, 2017 Comparative 4 / 38 History of China-Japan Revisited Conﬂict (oftentimes) becomes a natural companion of major institutional transformation

Introduction

Aoki (2001): institution as a self-sustained system of shared beliefs about how the game is played

I Dispute resolution mechanism is a key ingredient for any institution

I When shared beliefs break down, major disputes naturally emerge, and when shared beliefs about dispute resolution mechanism also collapse

Aoki (2001): institution as a self-sustained system of shared beliefs about how the game is played

I Dispute resolution mechanism is a key ingredient for any institution

I When shared beliefs break down, major disputes naturally emerge, and when shared beliefs about dispute resolution mechanism also collapse

Conﬂict (oftentimes) becomes a natural companion of major institutional transformation

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A Model andJuly 1, 2017 Comparative 4 / 38 History of China-Japan Revisited I Among many other examples, Meiji Restoration in Japan v.s. Xinhai Revolution in China

Introduction

The Question

I Why some institutional transition went about successfully, and why some transitions seemingly went bad?

The Question

I Why some institutional transition went about successfully, and why some transitions seemingly went bad?

I Among many other examples, Meiji Restoration in Japan v.s. Xinhai Revolution in China

Japan v.s China

I Landmark transitions I Old long-lasting political institution abandoned

I Japan: Oﬃce of military general (Shogunate) abolished I China: Thousands years of monarchy came to an end

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A Model andJuly 1, 2017 Comparative 6 / 38 History of China-Japan Revisited I Both countries had a political institution with diversiﬁed political power

I Japan: Oﬃce of Military General (Shogunate) - federation of hans I China: monarchy with the rise of gentry (partly in response to domestic instability)

Introduction

Japan v.s China

I Similarity right before transition

I Both countries faced external challenged to their sovereignty, together with domestic political instability as a result of weakened sovereignty

Japan v.s China

I Similarity right before transition

I Both countries faced external challenged to their sovereignty, together with domestic political instability as a result of weakened sovereignty

I Both countries had a political institution with diversiﬁed political power

I Japan: Oﬃce of Military General (Shogunate) - federation of hans I China: monarchy with the rise of gentry (partly in response to domestic instability)

Japan v.s China

I Divergence after transition

I Japan: a broad and far-reaching set of reforms implemented one after another, except for a 6 month major samurai rebellion, domestic environment remain by and large peaceful; at the end of the transition emerged oligarchy by a coalition of major hans; quickly rising to challenge China and Russia

I China: continuous power change and prolonged domestic conﬂicts, with some reforms implemented, economic development restricted in pockets of urban areas with weak sovereign power, while vast rural areas left behind, not able to defend against Japanese invasion; at the end of the transition emerged a single party monopoly of power

I Nation may plunge into prolonged conﬂicts after transition triggered by a sovereignty crisis if nation began with

I weak state capacity I large political diﬀerences among political forces that share the agenda of overthrowing the old guard

I The eventual institution emerging after prolonged conﬂicts tends to feature a more concentrated political structure

I Beyond China and Japan:

I Glorious revolution, French revolution, Russian revolution, ...

Introduction

Three-Party Game

I Three-party model to explain post-transition divergence after overthrowing the old guard

I Glorious revolution, French revolution, Russian revolution, ...

Introduction

Three-Party Game

I Three-party model to explain post-transition divergence after overthrowing the old guard, as well as pre-transition resilience

I Nation may plunge into prolonged conﬂicts after transition triggered by a sovereignty crisis if nation began with

I weak state capacity I large political diﬀerences among political forces that share the agenda of overthrowing the old guard

I The eventual institution emerging after prolonged conﬂicts tends to feature a more concentrated political structure

Three-Party Game

I Three-party model to explain post-transition divergence after overthrowing the old guard, as well as pre-transition resilience

I Nation may plunge into prolonged conﬂicts after transition triggered by a sovereignty crisis if nation began with

I weak state capacity I large political diﬀerences among political forces that share the agenda of overthrowing the old guard

I The eventual institution emerging after prolonged conﬂicts tends to feature a more concentrated political structure

I Beyond China and Japan:

I Glorious revolution, French revolution, Russian revolution, ...

The model: state capacity, political diﬀerences, conﬂicts, and sovereignty crisis

I ability to mobilise and organise resources, in particular human resources (by their allegiance) I can translate into ability to, e.g., raise tax or to engage in a conﬂict (“conﬂict management capacity” per Aoki).

sR (t) + sA(t) + sB (t) = s(t) ≤ 1

I s(t): total existing state capacity in the economy at period t

Model

State Capacity

I Economy (inﬁnite period) with three political forces:

R, A, B

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 11 / 38 History of China-Japan Revisited I ability to mobilise and organise resources, in particular human resources (by their allegiance) I can translate into ability to, e.g., raise tax or to engage in a conﬂict (“conﬂict management capacity” per Aoki).

sR (t) + sA(t) + sB (t) = s(t) ≤ 1

I s(t): total existing state capacity in the economy at period t

Model

State Capacity

I Economy (inﬁnite period) with three political forces:

R, A, B

I Each may have some state capacity in period t: sR (t), sA(t), sB (t)

I s(t): total existing state capacity in the economy at period t

Model

State Capacity

I Economy (inﬁnite period) with three political forces:

R, A, B

I Each may have some state capacity in period t: sR (t), sA(t), sB (t)

State Capacity

I Economy (inﬁnite period) with three political forces:

R, A, B

I Each may have some state capacity in period t: sR (t), sA(t), sB (t)

sR (t) + sA(t) + sB (t) = s(t) ≤ 1

I s(t): total existing state capacity in the economy at period t

I Identities of A and B hidden until one is involved in challenge against R

Model

Status Quo

I The economy begins with:

sR (0) : sA(0) : sB (0) = r : a : b 1 > r > max{b, a} 2

I R being the status quo ruler

Model

Status Quo

I The economy begins with:

sR (0) : sA(0) : sB (0) = r : a : b 1 > r > max{b, a} 2

I R being the status quo ruler

I Status quo ruler R cannot credibly share its government with others

Status Quo

I The economy begins with:

sR (0) : sA(0) : sB (0) = r : a : b 1 > r > max{b, a} 2

I R being the status quo ruler

I Status quo ruler R cannot credibly share its government with others

I Identities of A and B hidden until one is involved in challenge against R

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 12 / 38 History of China-Japan Revisited I i: political distance between A and B, I IA: political distance between A and R, IB between B and R

Model

Political Diﬀerence

I Three political forces also diﬀer in preferences for public goods

Model

Political Diﬀerence

I Three political forces also diﬀer in preferences for public goods

I i: political distance between A and B,

Political Diﬀerence

I Three political forces also diﬀer in preferences for public goods

I i: political distance between A and B, I IA: political distance between A and R, IB between B and R

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 13 / 38 History of China-Japan Revisited I Conﬂict takes place if A challenge R, followed by B (being opportunistic) choosing whether

to side with R, or to side with A, or to stay neutral (and identity remaining hidden)

I Otherwise, peace prevails and the status quo maintains

I If conﬂict, the side with larger sum of state capacity wins with probability one

Model

Conﬂict

I If period t begins with status quo:

I If conﬂict, the side with larger sum of state capacity wins with probability one

Model

Conﬂict

I If period t begins with status quo:

I Conﬂict takes place if A challenge R, followed by B (being opportunistic) choosing whether

to side with R, or to side with A, or to stay neutral (and identity remaining hidden)

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 14 / 38 History of China-Japan Revisited I If conﬂict, the side with larger sum of state capacity wins with probability one

Model

Conﬂict

I If period t begins with status quo:

I Conﬂict takes place if A challenge R, followed by B (being opportunistic) choosing whether

to side with R, or to side with A, or to stay neutral (and identity remaining hidden)

I Otherwise, peace prevails and the status quo maintains

Conﬂict

I If period t begins with status quo:

I Conﬂict takes place if A challenge R, followed by B (being opportunistic) choosing whether

to side with R, or to side with A, or to stay neutral (and identity remaining hidden)

I Otherwise, peace prevails and the status quo maintains

I If conﬂict, the side with larger sum of state capacity wins with probability one

A + B (because B sides with A), or R + B (because B sides with R), or R with hidden B (because B stays neutral)

I The winning side gets loser’ state capacity and acquire α portion of 1 − s(t): state capacity consolidation and expansion

I Members of the winning side (A + B or R + B) share the new total stock of state capacity:

I a member obtains a larger share with probability equal to its relative strength in status quo state capacity b I e.g., a+b for B in the A + B coalition.

Model

Conﬂict

I A political force becomes forever defunct if lose in a conﬂict

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 15 / 38 History of China-Japan Revisited I The winning side gets loser’ state capacity and acquire α portion of 1 − s(t): state capacity consolidation and expansion

I Members of the winning side (A + B or R + B) share the new total stock of state capacity:

I a member obtains a larger share with probability equal to its relative strength in status quo state capacity b I e.g., a+b for B in the A + B coalition.

Model

Conﬂict

I A political force becomes forever defunct if lose in a conﬂict

I After conﬂict in period t, either

A + B (because B sides with A), or R + B (because B sides with R), or R with hidden B (because B stays neutral)

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 15 / 38 History of China-Japan Revisited I Members of the winning side (A + B or R + B) share the new total stock of state capacity:

I a member obtains a larger share with probability equal to its relative strength in status quo state capacity b I e.g., a+b for B in the A + B coalition.

Model

Conﬂict

I A political force becomes forever defunct if lose in a conﬂict

I After conﬂict in period t, either

A + B (because B sides with A), or R + B (because B sides with R), or R with hidden B (because B stays neutral)

I The winning side gets loser’ state capacity and acquire α portion of 1 − s(t): state capacity consolidation and expansion

Conﬂict

I A political force becomes forever defunct if lose in a conﬂict

I After conﬂict in period t, either

A + B (because B sides with A), or R + B (because B sides with R), or R with hidden B (because B stays neutral)

I The winning side gets loser’ state capacity and acquire α portion of 1 − s(t): state capacity consolidation and expansion

I Members of the winning side (A + B or R + B) share the new total stock of state capacity:

I a member obtains a larger share with probability equal to its relative strength in status quo state capacity b I e.g., a+b for B in the A + B coalition.

I Choice of public goods: member with larger state capacity makes a take-it-or-leave-it oﬀer, if rejected, the two head to a conﬂict

I Joint government not feasible if R + B or R with hidden B

(R cannot credibly share its government)

Model

Conﬂict

I After new state capacity proﬁle determined, the winning side decides whether conﬂict again or peace

(R cannot credibly share its government)

Model

Conﬂict

I After new state capacity proﬁle determined, the winning side decides whether conﬂict again or peace

I If peace, joint government feasible if A + B,

I Choice of public goods: member with larger state capacity makes a take-it-or-leave-it oﬀer, if rejected, the two head to a conﬂict

Conﬂict

I After new state capacity proﬁle determined, the winning side decides whether conﬂict again or peace

I If peace, joint government feasible if A + B,

I Choice of public goods: member with larger state capacity makes a take-it-or-leave-it oﬀer, if rejected, the two head to a conﬂict

I Joint government not feasible if R + B or R with hidden B

(R cannot credibly share its government)

Payoﬀs

I State capacity of the government and political diﬀerence determines political forces’ payoﬀs during peace

u(t) = (1 − z)βsg (t)

β: productivity z ∈ {i, IA, IB }: political diﬀerence sg (t) : total state capacities of political forces involved in the government at t

I Zero payoﬀ during conﬂict

Analysis

I B’s decision after A challenges R

I A’s decision while anticipating B’s decision

I Institutional resilience: in what kinds of economies the status quo would have survived in equilibrium

I Sovereignty shock

B’s choice if A challenges R

i B sides with R B sides with R subsequent subsequent peace peace or conﬂict

(a+b)IB/a iB

B sides with A subsequent conﬂict

r(a+b)IB/a(r+b) B sides with A B sides with A subsequent subsequent peace peace

s1 s2 1

Figure: under condition (1)

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 19 / 38 History of China-Japan Revisited I the larger the total existing state capacity, the smaller the state capacity slackness (1 − s(t)) to gain from through conﬂict

I By dictating choice of public goods, dominant party can enjoy peace without suﬀering from political diﬀerence; hence s1, s2 independent of i

I If dominant in B + R, B suﬀer from political diﬀerence for not being able to share government with R; hence s2 > s1.

Analysis

Intuition

I Conﬂict consolidates and expands state capacity, but with “diminishing return to scale”:

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 20 / 38 History of China-Japan Revisited I By dictating choice of public goods, dominant party can enjoy peace without suﬀering from political diﬀerence; hence s1, s2 independent of i

I If dominant in B + R, B suﬀer from political diﬀerence for not being able to share government with R; hence s2 > s1.

Analysis

Intuition

I Conﬂict consolidates and expands state capacity, but with “diminishing return to scale”:

I the larger the total existing state capacity, the smaller the state capacity slackness (1 − s(t)) to gain from through conﬂict

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 20 / 38 History of China-Japan Revisited I If dominant in B + R, B suﬀer from political diﬀerence for not being able to share government with R; hence s2 > s1.

Analysis

Intuition

I Conﬂict consolidates and expands state capacity, but with “diminishing return to scale”:

I the larger the total existing state capacity, the smaller the state capacity slackness (1 − s(t)) to gain from through conﬂict

I By dictating choice of public goods, dominant party can enjoy peace without suﬀering from political diﬀerence; hence s1, s2 independent of i

Intuition

I Conﬂict consolidates and expands state capacity, but with “diminishing return to scale”:

I the larger the total existing state capacity, the smaller the state capacity slackness (1 − s(t)) to gain from through conﬂict

I By dictating choice of public goods, dominant party can enjoy peace without suﬀering from political diﬀerence; hence s1, s2 independent of i

I If dominant in B + R, B suﬀer from political diﬀerence for not being able to share government with R; hence s2 > s1.

Intuition

I For s(t) > s1, remaining neutral is dominated by siding with A as more consolidation of state capacity and having a chance to dominate the future joint government

I B sides with R dominates siding with A if i is too big.

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 21 / 38 History of China-Japan Revisited I Staying neutral is to be followed by peace, siding with A is to be followed by another conﬂict;

I The expected return of additional conﬂict to B increases in the relative strength of B; whereas the cost of staying neutral (with the consequence of giving R the victory) is increasing in IB

Analysis

B’s choice if A challenges R at t

I Suppose that s(t) ≤ s1. Then B will side with A provided that the following holds b δ(1 − α) > 1 − I (1) a + b B

Intuition

I For s(t) ≤ s1, siding with R is dominated by siding with A as siding with A having a chance to dominate the future joint government

Masahiko Aoki, Stanford University Jiahua Che, FudanA University Three-Party Masaki Game Nakabayashi, of Institutional University Resilience of Tokyo versus Transition A ModelJuly and 1, 2017 Comparative 22 / 38 History of China-Japan Revisited I The expected return of additional conﬂict to B increases in the relative strength of B; whereas the cost of staying neutral (with the consequence of giving R the victory) is increasing in IB

Analysis

B’s choice if A challenges R at t

I Suppose that s(t) ≤ s1. Then B will side with A provided that the following holds b δ(1 − α) > 1 − I (1) a + b B

Intuition

I For s(t) ≤ s1, siding with R is dominated by siding with A as siding with A having a chance to dominate the future joint government

I Staying neutral is to be followed by peace, siding with A is to be followed by another conﬂict;

B’s choice if A challenges R at t

I Suppose that s(t) ≤ s1. Then B will side with A provided that the following holds b δ(1 − α) > 1 − I (1) a + b B

Intuition

I For s(t) ≤ s1, siding with R is dominated by siding with A as siding with A having a chance to dominate the future joint government

I Staying neutral is to be followed by peace, siding with A is to be followed by another conﬂict;

I The expected return of additional conﬂict to B increases in the relative strength of B; whereas the cost of staying neutral (with the consequence of giving R the victory) is increasing in IB

Equilibrium Outcomes: A’s Choices

i B sides with R B sides with R subsequent subsequent peace peace or conflict Conflict Status following (a+b)IB/a Quo Conflict iB

B sides with A subsequent conﬂict B sides with A B sides with A subsequent subsequent peace peace

Peace following Conﬂict

s1 s2 1

Figure: conditions (1) and (2)

Equilibrium Outcomes: A’s Choices

I Suppose that s(t) ∈ (s1, 1]. Then there exists iA such that 1. A will not challenge R will remain for s(t) ∈ (min{iB , iA}, 1]. 2. A joined by B, will challenge R for i ≤ min{iB , iA}.

I Suppose that s(t) ∈ [0, s1]. Expecting B’s support, A will challenge R provided the following condition holds: a ≥ (1 − I )r. (2) a + b A

Sovereignty shock: three possible interpretations

I crumbling authority of the ruler

I changing political diﬀerences

I productivity shock

Crumbling of the Status Quo Ruler’s Authority under Sovereignty Crisis

I Sovereignty crisis causes r to drop

Sovereignty Crisis: Crumbling Authority

i B sides with R B sides with R subsequent subsequent peace peace or conﬂict Status (a+b)IB/a iB Quo

N iB B sides with A subsequent conﬂict

B sides with A B sides with A subsequent subsequent peace peace Japan iAN iA

Conflict Peace following following Conflict Conflict

s1 s2 1

Changing political diﬀerences under Sovereignty Crisis

I Sovereignty crisis causes IA and IB to increase, while i to shrink

Sovereignty Crisis: Changing political diﬀerences

i B sides with R B sides with R subsequent subsequent peace peace or conﬂict Status (a+b)IB/a N iB Quo

B sides with A subsequent conﬂict

B stays neutral B sides with A B sides with A subsequent subsequent subsequent peace peace peace Japan iAN iA

Conflict Peace following following Conflict Conflict

s1 s2 1

I s2: s(t) such that after two periods of conﬂicts, s(t + 2) = s

Analysis

Sovereignty Crisis as Productivity Shock

0 I β > β if s(t) > s

I β otherwise

I s2: s(t) such that after two periods of conﬂicts, s(t + 2) = s

Analysis

Sovereignty Crisis as Productivity Shock

0 I β > β if s(t) > s

I β otherwise

Sovereignty Crisis as Productivity Shock

0 I β > β if s(t) > s

I β otherwise

I s1: s(t) such that after one period of conﬂict, s(t + 1) = s;

I s2: s(t) such that after two periods of conﬂicts, s(t + 2) = s

Sovereignty Crisis: Before

i B sides with R B sides with R subsequent subsequent peace peace or conflict Conflict Status following (a+b)IB/a Quo Conflict iB

B sides with A subsequent conﬂict B sides with A B sides with A subsequent subsequent peace peace

Peace following Conﬂict

s1 s2 1

Sovereignty Crisis: Productivity Shock

China

i B sides with R B sides with R subsequent subsequent peace peace or conﬂict Status i* (a+b)IB/a Quo

i* B sides with A

N subsequent conﬂict iB B sides with A B sides with A Japan subsequent subsequent peace peace iAN

Conflict Peace following following Conflict Conflict

N s2 s1 s1 s1 s2 s 1

The Historical Narrative

Japan v.s. China: through the lens of Three-Party Game

I Japan: two major political forces joint hands to end the Shogunate

I War (Boshin war) with major hans (Choshu and Satsuma, together with Tosa) against the oﬃce of military general (Shogunate) I Followed by (almost) peace afterwards and an eventual oligarchy involving Choshu and Satsuma and Tosa coalition

I China: uprising by a large contingent of diﬀerent political factions ended the Chinese monarchy

I Followed by prolonged conﬂicts among these forces, including the Nationalist and later the Communist, eventual political monopoly

Japan v.s. China: through the lens of Three-Party Game

I Meiji Restoration

I Smaller political diﬀerences among key players, perhaps along with a maintained institutional ability to resolve diﬀerences

Apparent ineﬃciency + external factors + past separation of monarchy and administration

I Stronger state capacity even during Tokugawa (the last military general family), initial conﬂict (Boshin War) + land reform helped further strengthen state capacity

Japan v.s. China: through the lens of Three-Party Game

I Xinhai Revolution

I Greater political diﬀerence among key players, also lacked an institutional ability to resolve diﬀerences

Historical path with greater choice set + weak talent mechanism + sudden collapse of the monarchy + lacked tradition of consultation and discussion

I Weak state capacity, only to be strengthened through prolonged turmoils

No apparent Japan-type ineﬃciency (markets were there) + symbolic consolidation by compromise during Norther expedition without changing warlord structure

China Afterthoughts: Why Took Conﬂicts

I The paramount priority was perhaps to strengthen to defend sovereignty

I Repeated transgressions on sovereignty, with much more advanced technologies, in a vicious, seemingly unstoppable, fashion I Arguably, the only answer to deal with repeated transgression with much more advanced technologies lies in China’s “comparative advantage” in warfare: population I Thus came the need to reach to the populace, mostly in vast rural areas of China, mobilize and organize them to facilitate the functions of the state I Diﬃcult, if not impossible, to buy out oppositions without ﬁrst strengthening the state capacity

I The period of prolonged conflicts testified how different political forces in China raced against each other towards this national agenda

I Eventually a political monopoly with a deep-down apparatus that enabled central planning

Masa, We Miss You….