SANCTIONS IN A THREE-COUNTRY WORLD 1

International Economic Sanctions in a Three-Country World

Arthish Banerjee
Asmita Tiwari
Latika Khatwani
Department of Economics, Indian Institute of Foreign Trade
Microeconomics II
Supervised by: Dr. Oindrila Dey
May 19, 2023
SANCTIONS IN A THREE-COUNTRY WORLD 2

Abstract

Having been considered one of the foremost tools in the international arena for
maintaing peace and harmony among nations in the face of belligerence, economic
sanctions continue to take up an important position in policy debates due to its large
cost and varied benefits. Previous research in this area have modeled the problem for
two-country cases, but we try to provide a three-country game-theoretic structure to
model the optimal strategy of the primary sanctioner, where the decision of cooperation
or exploitation by a third party is analysed.
Keywords: game theory, economic sanctions, bayesian nash equilibrium
SANCTIONS IN A THREE-COUNTRY WORLD 3

International Economic Sanctions in a Three-Country World

Introduction

This paper aims to look at the impact that the secondary senders might have on
sanctioning decisions of the primary senders. Most of the basis of this work is from
previous analysis of international sanctions (Tsebelis, 1990) where an extensive analysis
of the sanctions process in various types of games were taken up and analysed against
the backdrop of various kinds of situations implied by the game itself. Previous work in
this regard also include a two-country multi-period case which was developed with the
idea of ‘resilience’ of target countries in mind (Lacy & Niou, 2004). An analysis of
post-imposition ramifications of sanctions where the target misjudges the determination
of the sender country is a different line of thought (Hovi, Huseby, & Sprinz, 2005).
Similar analysis of the type of sender country instead of receiver where the sender could
be a ‘hawk’ (imperialist) or a ‘dove’ (Baliga & Sjöström, 2008) is an interesting study
which analyses the situation from a different lens.

Most of our basic idea about the economic implications of sanctions have been
formed from previous existing work in this field (Miyagawa, 2016), and the specific
focus of this study is to look at the effectiveness of international support in cases of
international sanctions, while trying to corroborate it with existing empirical
research (Bapat & Morgan, 2009; Morgan, Bapat, & Krustev, 2009; Bapat, Heinrich,
Kobayashi, & Morgan, 2013). The results in those papers show that the anticipated and
actual costs tied to the sanctions are important in the countries’ decision making
decisions, and that multilateral sanctions (with the presence of a secondary sender) are
expected to succeed more than unilateral sanctions. While the distinction between
actual and anticipated costs are not explicitly modeled in our study, we shall try to
explore the relationship between the primary sender’s costs and the sanctioning
decision; and also the optimal strategy for the primary sender in such multilateral cases.
The game is also inspired by other such empirical research done to this end (Drezner,
2000) and tries to mimic real interactions between nation-states while trying to provide
a simple theoretical framework to analyse national behaviour. Our result is in line with
SANCTIONS IN A THREE-COUNTRY WORLD 4

the ‘9 Commandments’ famously outlined in another influential paper (Hufbauer &

Schott, 1985) the most notable of which is the second commandment, which preaches
attacks against the weak. Our assumption of ‘normal’ and ‘resilient’ nations in our
model allows us to look at those factors. In this game, the payoffs have been inspired by
previous work done (Ash Shidiqi & Pradiptyo, 2011) in this field with some changes
made for applicability and convenience and of course especially with the addtition of
the second country (or the third party) in this game.

The Game Theoretic Model

Premise and Assumptions

• The target country T has violated international norms before the game begins.
• A sanction may be imposed by the primary sender, S1 , to inflict maximum
damage upon T .
• The second country in this world, S2 may either support S1 and play ‘Sanction’ or
stay neutral and ‘Not Sanction’ or side with the Target T and ‘Exploit’ the
sanctioning decision of S1 and derive exploitation benefits out of the same.
• S1 seeks support from S2 to sanction T , and S1 alone cannot sanction T in this
particular case. However, if S1 sanctions and S2 does not, S1 still incurs the
sanction cost.
• A resilient type T never incurs costs of violations of norms due to socioeconomic
factors like the ‘rally around the flag’ effect.
• Only ‘Not Comply’ from T finally results in sanctions. All cases of ‘Comply’ do
not get any violation benefits bv nor incur any violation costs cv but do get
reputational benefits r3 of compliance.
• The sender country chooses to ‘Not Sanction’ if it is indifferent between the
outcomes of the actions.

Model

The variables of interest for us may be listed as,

• bv – utility benefit T receives from the violation of international norms.

SANCTIONS IN A THREE-COUNTRY WORLD 5

• cv – cost (consequence) of non-compliance to a normal T .

• ri – reputational benefit country i receives from either sanctioning or complying
∀i ∈ {1, 2, 3}.
• bi – utility benefit of sanctions success to sanctioning countries ∀i ∈ {1, 2}.
• ci – cost of sanctions to sanctioning countries ∀i ∈ {1, 2}.
• be – benefit of successfully exploiting the sanction action of S1 received by S2 .
Exploitation success occurs when T plays NC after S2 plays E.
• θ – Nature creates Resilient type T countries with probability θ and Normal type
T with probability (1 − θ), where 0 < θ < 1.
• α – helps measure the greater hit to reputation r1 that S1 endures when a Normal
type T does not comply or is not sanctioned by S1 , where 0 < α < 1.

A game-tree representation may be illustrated as follows,

C (b1 +r1 −c1 , b2 +r2 −c2 , r3 )

T
S NC (−r1 −c1 , −r2 −c2 , bv )

N
S2 (−c1 , −r2 −c2 , bv +r3 )
S
E C (b1 +r1 −c1 , b2 , r3 )
N T
Resilient NC (−r1 −c1 , be , bv )
θ
(−r1 , 0, bv + r3 )
Nature S1
(−(1+α)r1 , 0, bv + r3 )
1−θ
N ormal C (b1 +r1 −c1 , b2 +r2 −c2 , r3 )
N
T
S NC (−(1+α)r1 −c1 , −r2 −c2 , bv − cv )

S N
S2 (−c1 , −r2 −c2 , bv +r3 )

E C (b1 +r1 −c1 , b2 , r3 )

T
NC (−(1+α)r1 −c1 , be , bv )

This is a sequential game of private information, and will therefore have a

Bayesian Nash Equilibrium (BNE)1 , since the type of T is only known to itself and to

1
This question was raised to us in the class presentation: Why should this game not have a Perfect
SANCTIONS IN A THREE-COUNTRY WORLD 6

nobody else. This essentially means that S1 shall not not know which node it is on
when it is its turn to move, as it does not know the payoff of T , which is dependent on
its type. Since the target country does not need to update its belief about the type of
any previous mover (due to S1 and S2 being of only one type), no Perfect Bayesian
Equilibrium (PBE) may be reached.

Case 1. When bv > bv − cv > r3 holds.

Lemma 1. It is optimal for S1 to always ‘Not Sanction’ for any positive cost of
sanctioning faced by it, i.e., (c1 > 0) iff both the gross and net benefit of norm violation
exceeds the reputational benefit of compliance for country 3, the target.

Proof. For the given condition bv > bv − cv > r3 being true, we conclude that the
optimal strategy for both Resilient and Normal types of T (country 3) is to always play
NC or ‘Not Comply’. Given this foresight, it would be optimal for country 2 or S2 to
always play E or ‘Exploit’ since be > −r2 − c2 is evidently true. The expected payoff for
country 1 or S1 will therefore be given by:

EU1 (S) = θ(−r1 − c1 ) + (1 − θ)(−(1 + α)r1 − c1 )

(1)
= r1 (αθ − α − 1) − c1

for playing S or ‘Sanction’, and

EU1 (N ) = θ(−r1 ) + (1 − θ)(1 + α)(−r1 )

(2)
= r1 (αθ − α − 1)

for playing N or ‘Not Sanction’. In other words, country 1 or S1 shall only choose to
‘Sanction’ iff EU1 (S) > EU1 (N ), or

r1 (αθ − α − 1) − c1 > r1 (αθ − α − 1), or

c1 > 0

Therefore, given that T shall always choose to ‘Not Comply’ and that it shall always
thus be optimal for S2 to ‘Exploit’, then for any positive cost of sanctioning incurred by
S1 , i.e., c1 > 0 it shall always choose to ‘Not Sanction’.

Bayesian Equilibrium (PBE) and instead be solved with a BNE?

SANCTIONS IN A THREE-COUNTRY WORLD 7

Case 2. When bv > r3 > bv − cv holds.

In this case, while NC remains the dominant strategy for the Resilient type T, the
optimal strategy for the Normal type T becomes (C, NC). S2 would still choose to
‘Exploit’ when faced with a Resilient T, but when dealing with a Normal T two
subcases would arise:
Subcase (i): When b2 + r2 − c2 > be holds.

Lemma 2. It is optimal for S1 to always ‘Sanction’ for any c1 < c∗1 where
c∗1 = (1 − θ)[b1 + (2 + α)r1 ] iff the gross benefit of norm violation exceeds the
reputational benefit of compliance which in turn is greater than the net benefit of
violations for T and the net benefit of sanctioning to S2 is greater than the benefit that
S2 gets by exploiting S1 ’s sanctioning decision.

Proof. For the given subcondition,

EU1 (S) = θ(−r1 − c1 ) + (1 − θ)(b1 + r1 − c1 )

(3)
= r1 (1 − 2θ) + b1 (1 − θ) − c1
while the EU1 (N ) will still be identical to (2) since the payoffs for ‘Not Sanction’ to S1
shall not change. Therefore, for S1 to ‘Sanction’,

EU1 (S) > EU1 (N ), or

r1 (1 − 2θ) + b1 (1 − θ) − c1 > r1 (αθ − α − 1), or

(4)
c1 < (1 − θ)[b1 + (2 + α)r1 ], or

c1 < c∗1
This implies that for a critical value of the cost of sanctioning to country 1, c∗1 , country
1 will only ‘Sanction’ when c1 < c∗1 where c∗1 = (1 − θ)[b1 + (2 + α)r1 ].

Subcase (ii): When b2 + r2 − c2 < be holds.

Lemma 3. It is optimal for S1 to always ‘Not Sanction’ for any positive cost of
sanctioning, c1 > 0, iff the gross benefit of norm violation exceeds the reputational
benefit of compliance which in turn is greater than the net benefit of violations for T and
the benefit that S2 gets by exploiting S1 ’s sanctioning decision is greater than the net
benefit of sanctioning to S2 .
SANCTIONS IN A THREE-COUNTRY WORLD 8

Proof. The optimal strategy for S2 will still be (E,E) according to the given subcase as
the benefit of exploitation exceeds the utility from sanctioning in all scenarios. The
expected payoff for S1 shall then continue to be as in (1) and (2) respectively, leading us
to the c1 > 0 condition on playing ‘Not Sanction’ that we have already encountered
before. S1 will still play NS for all positive costs of sanctioning faced by it.

Case 3. When r3 > bv > bv − cv holds.

Lemma 4. It is optimal for S1 to always ‘Sanction’ for any cost of sanctioning,

c1 < c∗∗ ∗∗
1 , where c1 = b1 − r1 (αθ − α − 2), iff the reputational benefit of compliance

exceeds the gross benefit of norm violation which in turn is greater than the net benefit
of violations for T .

Proof. The optimal strategy for all types of target countries would be to comply (C, C,
C, C). For S2 , two subcases may arise:
Subcase (i): b2 + r2 − c2 > b2 , or r2 > c2 .
Subcase (ii): b2 + r2 − c2 < b2 , or r2 < c2 .
In both cases, irrespective of the move of S2 , the expected utilities of sanctioning by S1
are given by,

EU1 (S) = b1 + r1 − c1 (5)

while EU1 (N ) is still as given by (2). Given these expected utilities, S1 shall ‘Sanction’
only if,

EU1 (S) > EU1 (N ) or

b1 + r1 − c1 > r1 (αθ − α − 1), or

b1 − c1 > r1 (αθ − α − 2), or (6)

c1 < b1 − r1 (αθ − α − 2), or

c1 < c∗∗
1

S1 shall only therefore want to sanction T when the cost incurred by S1 for imposing
such a sanction shall be less than a critical cost of sanctioning, c1 < c∗∗
1 , where

c∗∗
1 = b1 − r1 (αθ − α − 2).
SANCTIONS IN A THREE-COUNTRY WORLD 9

Conclusion

The following table is helpful to list out all of the possible scenarios and optimal
strategies for the sender nation, keeping in mind all the different cases and subcases
that may arise from solving the game-theoretic problem. It is therefore of great
importance to consider the impact that the decision-making of sanctioning collaborators
have, on the final outcome of the sanctioning game.

Case Subcase Optimal Strategy Condition

bv > bv − cv > r3 None Not Sanction c1 > 0

bv > r3 > bv − cv b2 + r2 − c2 > be Sanction c1 < c∗1
{c∗1 = (1 − θ)[b1 + (2 + α)r1 ]}
b2 + r2 − c2 < be Not Sanction c1 > 0
r3 > bv > bv − cv b2 + r2 − c2 > b2 Sanction c1 < c∗∗
1

b2 + r2 − c2 < b2 Sanction c1 < c∗∗

1

{c∗∗
1 = b1 − r1 (αθ − α − 2)}

It is therefore evident that the primary sender’s sanctioning decision is based

heavily upon the probability of the secondary sender’s decision to exploit the sanctions
thus imposed, leaving the primary sender prone to reputational and economic losses.
This kind of distrust between the sanctioning partners and the objective of the
secondary senders to maximise their own benefit nessecitates the existence of certain
critical costs c∗1 and c∗∗
1 at or above which the primary sender will not be willing to

sanction at all (going by the assumption that when the sender country is indifferent
between the utilities derived from its actions, it always chooses to ‘Not Sanction’).
It is therefore seen that the primary sender will always lean towards the prospect
of not sanctioning a target except for a few specific scenarios, and that too, only when
the costs are low enough for the primary sender to initiate sanctions.
SANCTIONS IN A THREE-COUNTRY WORLD 10

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