Some theory: on the benefits and costs of informal international law

This section discusses the costs and benefits of informal international law.

More specifically, we are interested in identifying the conditions under which governments prefer informal international law over formal interna-tional law (i.e., formal treaties that need to be ratified domestically) and vice versa. Governments are assumed to be rational utility-maximisers.

Based on insights from the new institutional economics, we deduce a num-ber of concrete cost-benefit considerations comparing the making of in-formal international law with more in-formal treaty making. But first, we briefly review Lipson’s work on this topic.¹⁰

Lipson states that informal agreements are more flexible than formal ones, make fewer informational demands on the parties, and can be con-cluded and implemented more quickly than formal ones. Moreover, they are less public and less prominent than formal agreements. Consequently, they should also be less subject to slack because they can be controlled by the (executive) agency that created them, which is equivalent to having a shorter principal-agent chain. As a cost, Lipson mentions that they can also be more easily abandoned.¹¹ In summarizing his conclusions, Lipson writes: ‘These costs and benefits suggest the basic reasons for choosing informal agreements: (1) the desire to avoid formal and visible pledges, (2) the desire to avoid ratification, (3) the ability to renegotiate or modify as circumstances change, or (4) the need to reach agreements quickly.’¹²

10 See C. Lipson (1991).

11 Ibid., 501.

12 Ibid.

I. Differences in transaction costs

Coase¹³ was interested in the economic rationale behind the existence of firms. Many economists are convinced that markets are the best available allocation mechanism, so why are firms founded and why do they survive?

Coase introduced a cost category known as transaction costs. These are the costs of using the market, i.e., the costs incurred in finding interaction partners, negotiating contract details with them, and monitoring compli-ance with the contract. If transaction costs are high but the cost of organis-ing some activities within a hierarchy are relatively low, then a firm could be more cost effective than the market. Transaction costs are also incurred in both informal and formal international lawmaking. However, the cost differentials between these two forms of cooperation might differ. I pro-pose a number of relevant transaction cost categories here and combine them with a conjecture concerning their relative importance. Analysing cost differences between hard and soft law will enable us to make predic-tions concerning government choices.

Relevant transaction cost categories include the following:

Negotiation costs: Given that formal law constrains governments more than informal law, governments can be expected to invest more time into the precise wording of formal law. We, hence, assume that cf > ci.¹⁴

Ratification costs: Formal law needs to be formally ratified domestical-ly. Often, many actors need to consent, quite frequently with super-majorities. None of this applies to informal law, implying that cf > ci.

Monitoring costs: International agreements are concluded to induce a specific behaviour by the contracting parties.¹⁵ Monitoring is needed to ascertain whether parties comply with the agreements they have concluded.

Formal treaties are often accompanied by the creation of IOs, one of the main tasks of which is to collect information on the behaviour of ratifying States. Monitoring is often centralised and its costs shared among States.

This is, however, usually not the case with informal international law. This implies that cf < ci.

Enforcement costs: The possibility of appealing to a third party in case of a conflict over the appropriate interpretation of an agreement is unusual

13 See R. Coase (1937).

14 Given that there is no difference between formal and informal law as to their ben e-fits, rational utility-maximisers would opt in favour of informal law. Yet, there might be substantial differences in benefits, and these need to be taken explicitly into account before a rational decision can be made. It is not excluded that bureaucrats will take the same level of care in negotiating agreements no matter whether formal or informal. The cost advantage of informal law in terms of negotiation costs might, hence, only be miniscule.

15 Or, in the event they are already behaving in accordance with an agreement even before it is put in place, to make their behaviour more certain.

in case of informal international law. Such procedures, however, are often a part of formal law. The availability of such procedures implies that cf <

ci.

Modification costs: Sometimes agreements have unintended effects and at least one partner will want to modify the original agreement. Given the higher degree of formality under formal law making, informal law making should be less costly in such a case, such that cf > ci.

Exit costs: If the results attained by an international agreement are com-pletely unsatisfactory, the parties may desire to abandon the agreement altogether. Informal international law would seem to have a cost advantage over formal law is such a case, hence cf > ci.

It is noteworthy that formal lawmaking is conjectured to have cost ad-vantages regarding both monitoring and enforcement, leading to a hypoth-esis regarding the choice of lawmaking: ceteris paribus, i.e., under given benefits, rational law-makers will prefer informal international law to more formal law if neither monitoring nor enforcement cause substantial prob-lems. This could be the case, for example, if an agreement is self-enforcing, i.e., there are no incentives for unilateral defection.¹⁶

II. The choice of law as the choice of governance structure According to Williamson, the choice of governance structures should be determined by (1) the frequency with which partners interact, (2) the asset specificity necessary for carrying out the agreement, and (3) the degree of uncertainty present.¹⁷ Low frequency combined with a low degree of asset specificity would lead to choosing market exchange, whereas high fre-quency combined with a high degree of asset specificity would lead to uni-fied governance. The third dimension, uncertainty, becomes relevant only when there is a high degree of asset specificity, in which case higher de-grees of uncertainty would lead to more unified forms of governance.¹⁸ Is it possible to meaningfully apply these dimensions to the choice of govern-ance structures in international lawmaking?

Regarding frequency, Williamson makes a distinction between ‘some-times’ and ‘regularly’. One could argue that almost all States interact sometimes, e.g., at the UN General Assembly and similar meetings. More

16 See K. Abbott and D. Snidal (2000). They conjecture that formal law reduces the transaction costs of subsequent interactions more than informal law. In conjunction with our considerations, their argument implies a trade-off: the higher costs of formal lawmak-ing must be weighed against the lower costs of structurlawmak-ing interactions under it. Hence, to identify the optimal choice for a given government, its time preference needs to be taken into account.

17 (n. 9).

18 (n. 9), 79.

regular interaction could be the consequence of geography; externalities could result in higher frequency. It is not obvious how to translate asset specificity to agreements between nation-States. One way to think about it, though, is to ask whether specific investments by private actors residing in the States that agree on some interaction are likely to follow suit. Agreeing on a certain standard could be followed by investments that pay off only given that the standard will be used. Asset specificity implies a hold-up risk, and this risk would be borne by private law subjects residing in the interacting States, not by the States themselves. Given that agreements are reciprocal, the hold-up problem does not seem that severe, though.

Given a mixed degree of asset specificity, Williamson argues that for partners who interact only ‘sometimes’ trilateral governance would be best, whereas for partners who interact ‘regularly’, bilateral governance, in the sense of relational contracts, would be optimal. Trilateral governance implies drawing on some arbitration or mediation mechanism in case of conflict, whereas relational contracts are based on the idea that the rela-tionship is ongoing and that the net advantages of an ongoing relarela-tionship do not need to be perfectly balanced at each point in time.

Figure 1: Efficient governance structures according to Williamson Characteristics of Investment Good Non-specific Mixed Idiosyncratic

Frequency

Sometimes Market Governance (Classical notion

of contract)

Trilateral Governance (Neoclassical

notion of contract)

Regularly Bilateral

Governance (Relational

con-tracts)

Unified Governance

Analogising from the choice of firm structures to the choice of internation-al law, one could argue that the equivinternation-alent of bilaterinternation-al governance is in-formal international law, whereas the equivalent of trilateral governance is formal law. The choice of either form is primarily determined by the fre-quency of interaction. Thus, in attempting to explain government choices, it might be helpful to take frequency of interaction explicitly into account.

Comparison of various transaction cost categories as well as comparison of factors determining choice of governance structures are both based on a

decision-theoretic framework: the acting government assumes its environ-ment to be exogenously given; hence, strategic interaction is assumed to be absent.

This is somewhat unsatisfactory, however, as international law, both formal and informal, is the outcome of an exchange between government representatives of at least two countries. Game theory provides an appro-priate framework for dealing with strategic interactions, and is discussed next.

III. Mutual cooperation in the prisoners’ dilemma

There is an important body of literature that deals with the possibility of reaching mutual cooperation in the prisoners’ dilemma (PD) in the absence of a centralised authority with the power to enforce previously made prom-ises.¹⁹ Information about past behaviour of actors is a crucial factor: given that an actor has always behaved as previously promised, they enjoy a good reputation that allows them to find partners for interaction in the fu-ture.²⁰ However, if they have not behaved as promised and provided that this is common knowledge, finding partners to interact with will be much more difficult. In other words, reaching mutual cooperation in PDs without centralised enforcement depends, amongst others, on the availability of information regarding the past behaviour of all actors involved. Past be-haviour can be evaluated only if the agreements the relevant actors have entered into are also known.

IV. Hypotheses

I now translate the insights drawn from Coase, Williamson, and the PD into several hypotheses. Drawing on Coase, I conjecture that informal law is more likely to be used in interaction situations when monitoring and enforcement are not a huge problem.

H1: informal international law will be primarily used in coordination games, whereas formal law will be used to deal with games involving a higher amount of conflict.

Assume that all games can be ranked by the degree of conflict inherent in them (i.e., from pure coordination to zero-sum games). To solve pure

19 See e.g., R. Axelrod (1984); A. Greif (2006); P. Milgrom, D. North and B. Weingast (1990); A. Guzman (2008).

20 Other factors determining the likelihood of managing mutual cooperation are (1) the likelihood of meeting again and (2) the time-discount rates of the parties.

coordination games, creation of a focal point or a salient solution²¹ is suffi-cient as no single actor can benefit from unilateral defection. The incentive to defect increases as the conflict element increases; to guard oneself against being taken advantage of, States might try to insure themselves via more formal deals.

According to Williamson, regular interaction is a precondition for rela-tional contracts. Translated into the realm of internarela-tional law, I conjec-ture:

H2: The more regularly the relevant countries interact, the more likely are they to resort to informal law to structure their interactions.²²

This hypothesis takes into account that repetition is key to maintaining the mutually cooperative solution. The central insight regarding the mutu-ally cooperative solution in PDs played in the absence of a central authori-ty is that common knowledge of previous behaviour of the actors is cru-cial. A low degree of publicness, however, is the norm in informal international law. Some of the agreements are not even in writing, which limits the degree to which they can be publicly known. This observation is the basis of a third hypothesis:

H3: Due to its limited publicness, informal international law is unlikely to structure interaction situations that are characterised by the PD; it is more likely to structure coordination games in which there are no incen-tives for unilateral defection.

Sometimes, governments have an interest in making their (domestic) policy promises more credible: for example, governments trying to attract foreign direct investment have a substantial interest in making credible their promise to protect private property rights. It is argued that govern-ments use international agreegovern-ments to enhance the credibility of their promises.²³ If that is indeed the government’s goal, then formal lawmaking will be more beneficial than informal law as its binding quality is much stronger. Credibility can also be signalled by securing the support of many domestic veto players in favour of a piece of specific legislation; this can be interpreted as a signal of the earnestness of the government’s intentions.

Since it is less costly to pass informal than formal law, the signal produced by informal international law is less valuable than that produced by pass-ing formal law.

21 See T. Schelling (1960).

22Abbott and Snidal (n. 16), 448, formulate a similar hypothesis, but based on of a different argument. They argue that powerful States are most concerned with delegation as it can entail considerable sovereignty costs, which they would prefer not to incur.

From this it would seem to follow that powerful States prefer soft law (inter se but also with less powerful ones; since they are powerful, they should be able to secure their most preferred form of legalisation) but powerless States would agree on hard law inter se.

23 See B. Levy and P. Spiller (1994); A. Dreher and S. Voigt (2011).

From this observation, it seems reasonable to expect that States that do not enjoy a good reputation – and that thus could be searching for a way of making credible commitments – will prefer formal over informal agree-ments because only the former will build credibility. We would hence ex-pect that informal law is primarily used as an instrument for coordinating behaviour between parties that have long-established ties and whose rela-tionship can be characterised as well-functioning.

H4: Governments prefer formal law over informal law if they are inter-ested in improving their credibility.

This is a very general hypothesis. I propose to narrow it by highlighting specific country types that might have an interest in more formal agree-ments:

H4a: Young States are expected to prefer formal lawmaking to informal law.²⁴

H4b: States undergoing extensive transitions are expected to prefer formal to informal law.

Alternatively:

H4c: informal law will be primarily used by States already enjoying a good reputation.

These hypotheses put a high premium on credibility, but there are situa-tions making it more likely that young countries will prefer informal law.

For example, given that highly qualified diplomats are scarce, the lower costs incurred by informal international law could well lead some (likely younger) governments to prefer informal over more formal law.

One way to enforce contracts in the absence of a central enforcement authority is by the exchange of collateral or hostages.²⁵ Compliance with the agreement is secured because the other party has in its possession something valued by the first party. In case of non-compliance with the agreement, the other party could threaten to destroy the hostage, sell it to a third party, etc. Given that the secrecy of informal law is one of its chief attractions, revealing its existence could pose such a credible threat. In other words: the secret is the hostage. It would be very interesting to dis-cover whether, and if so, the consequence of such a threat has ever been made a reality.²⁶

International agreements can be concluded between just two States or involve a great many States. Generally speaking, the more States

24 Note that this does not necessarily imply that young States will indeed rely more on formal law than older countries. The actual choice is determined by all partners. If the hypothesis is correct, however, we should observe an above-average reliance on formal law when young countries enter into agreements inter se.

25 See A. Kronman (1985).

26 Given that the US regularly publishes its informal agreements, we will not be able to test this conjecture with our dataset.

pate in an agreement, the higher the monitoring costs. Substantial monitor-ing costs may make it very desirable to set up an international secretariat to perform that task. Establishing such secretariats, however, entails a certain degree of formality. We thus conjecture:

H5: Due to increasing monitoring costs, informal law is likely to be agreed upon among a limited number of participants, most likely only two.²⁷

This hypothesis may need to be more precise. Both negotiation and monitoring costs increase with the number of participants. Thus, the opti-mal governance structure also depends on which transaction cost category grows faster. If negotiation costs grow faster than monitoring costs, it could well be that informal law is agreed upon by a number of States larger than two.

International lawmaking can be unpopular with the general public, for example, if it is viewed as reducing domestic sovereignty. If this is the case, politicians might prefer informal law as long as they think they can hide it.²⁸ Similarly, if politicians are interested in not being too strictly bound, they might prefer informal over formal law. This might be the case if one party had a strong interest in an international agreement, but its partner would prefer no agreement at all.²⁹

H6: Politicians will prefer informal over more formal law if the agree-ment is unpopular among their constituents.

Another reason international lawmaking could be unpopular among large parts of the population is because it privileges a limited few. If it is lobbied for by interest groups that make large donations or confer other advantages on politicians, politicians might try to square the circle – i.e., staying popular with the voters whilst maintaining the support of specific interest groups – by passing agreements that are largely hidden from the

27 Abbott and Snidal (n. 16), 445, argue the exact opposite. They construct a trade-off between many participants and soft law on the one hand, and a small number of partic i-pants and harder law on the other. Empirical analysis is needed to ascertain which hy-pothesis is supported by the facts.

28 If this does indeed describe politicians’ preferences, the above argument according to which publication of a hitherto hidden agreement constitutes a credible threat is appl i-cable. This sort of action can be described as something such as: this is highly unpopular, we only do it because nobody knows, whereas the well-known scapegoat function of international agreements works in an almost opposite way: this is highly unpopular, we do it because some IO forces us to. The scapegoat tactic is unlikely to be effective in bilateral relationships, however. It is more likely to be effective in very firmly esta

28 If this does indeed describe politicians’ preferences, the above argument according to which publication of a hitherto hidden agreement constitutes a credible threat is appl i-cable. This sort of action can be described as something such as: this is highly unpopular, we only do it because nobody knows, whereas the well-known scapegoat function of international agreements works in an almost opposite way: this is highly unpopular, we do it because some IO forces us to. The scapegoat tactic is unlikely to be effective in bilateral relationships, however. It is more likely to be effective in very firmly esta

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