Dispute Settlement Design for Unequal Partners: A Game Theoretic Perspective

When signatories of international agreements fail to comply unintentionally, sanctioning rules designed to deter intentional noncompliance are tested. To provide signatories with the best treaty value, we find that remedies in case of unilateral defection must account for the nature of the inequality between treaty partners, as well as the type of mixed motive game they are engaged in. Trigger type schemes, that rely on punishment by mutual defection, are the norm for sanctioning in treaty texts. Inequality is addressed by proposing that the process leading to retaliation be accelerated when a weaker partner faces the noncompliance of a stronger partner. Our analysis suggests instead that the prescription depends on the source of the inequality. If inequality stems from differences in the costs associated to compliance, the stronger partner, with the lower compliance costs, should be given more time, not less, to settle in the shadow of the law if he deviates. Despite their prevalence, trigger schemes are not well suited to the handling of Chicken or Called Bluff games that may define the stakes in environmental accords. This motivates our analysis of an alternative sanctioning scheme that builds in redress for the victim of a unilateral defection. In addition to its ability to handle alternative game structures, we find that this scheme provides better treaty value than trigger type schemes, as well as credible deterrence, to signatories engaged in a Prisoner's Dilemma game. We conclude that, in the design of sanctioning schemes, redress for the injured party is better than punishment by defection.