Bargaining in Less-Democratic Newly Industrialized Countries

Abstract

Do governments in less-democratic newly industrialized countries (NICs) bargain with their citizens? In this article we develop a game-theoretic model to show that the government may not be able to avoid bargaining in open economies such as the Asian NICs when economic conditions are less than optimal. The reason is that, in the absence of government bargaining, citizens acting rationally and strategically choose to withdraw resources such as labor or production investment from a weak economy. Under these circumstances, government bargaining to elicit resource investment is a sub-game perfect equilibrium outcome. To test the model, we analyze data on production investment in the Asian NICs of South Korea, Taiwan, Singapore, and Malaysia from the 1960s to the 1990s. The analysis supports the prediction of the formal model and, hence, makes three contributions to the study of this topic. First, when we relax the assumption that citizens are naïve, governments in less-democratic open economies such as the Asian NICs may not be able to avoid bargaining with their citizens. Second, resource-withholding or withdrawal is an equilibrium strategy that convinces the government to bargain. Third, governments may bargain credibly even in the absence of formal constraints.