DANIEL W.DREZNER 715 a demand(D),attached to a threat of economic coercion.6 It might represent a shift in Target's policy on an international issue,a shift in one of Target's policies toward Sender,or a change in one of its domestic policies that has international ramifica- tions.The demand is an action that hurts the target regime and benefits the sender regime.Note that the sender can calibrate the size of its demand;this decision is endogenous to the game. If Sender chooses to make a demand,then Target must decide between backing down and standing firm.If it chooses to back down,the outcome is Acquiescence (AQ);Target agrees to Sender's demand.Ifit chooses to stand firm,however,Sender has the last move.It could choose to back down and accept the Status Quo(SQ),or carry out the threat of disrupting economic exchange,which produces an outcome of Deadlock(DL).The Deadlock outcome means that Sender disrupts some bilateral economic exchange.This could include suspending aid,imposing trade barriers, freezing financial assets,or reducing investment flows.This action would obviously be painful to Target,and presumably painful to Sender.The opportunity costs of such an action would be the scarce resources needed to compensate for the interrupted exchange.Small opportunity costs imply that the costs of substitution are low (i.e.,low levels of asset-specific investment).The Deadlock outcome is essentially a stalemate;Sender and Target both incur costs,but Target makes no concessions. Figure I also shows the payoffs for each outcome.All of the payoffs are relative to the Status Quo outcome.Sender and Target payoffs in the Status Quo are normalized to zero.Status Quo Ante produces the same outcome,plus a small increase(o)for both actors.The difference between SQ and SQA is that Sender's threat temporarily freezes the bilateral relationship,preventing further increases of trade or investment.Even if the threat is not carried out,the crisis is sufficient to cast a pall on the economic relationship.Acquiescence also delivers the Status Quo payoffs,but there is also a direct transfer;Sender gains and Target loses the demand D.7 Finally,the Deadlock outcome disrupts the bilateral relationship.Both actors suffer costs from the loss ofeconomic exchange.Sender and Target receive penalties of -c(s)and -c(t),respectively. If the sender and target countries cared only about their short-run absolute benefits,backwards induction produces a unique outcome.Sender,choosing be- tween backing down or standing firm,will always back down;it will prefer the benefits of continued economic ties to the costs of economic disruption.That is to say,0>-c(s).Moving backwards,Target,at its decision node,knows that Sender will back down.Therefore,its strategic choice is between acquiescing to Sender's demands,or standing firm and reaching a Status Quo outcome.Since Target must concede in an AQ outcome,it will always prefer the Status Quo payoff and elect to stand firm.Finally,Sender must decide between doing nothing and arriving at Status Quo Ante,or making a threat and reaching the Status Quo.Because Sender always prefers the additional benefit from the SQA payoff,it will do nothing. Therefore,if one assumes that Sender and Target care only about their own payoffs, the unique equilibrium of this game is Status Quo Ante.Because the sender will not prefer to carry out a costly threat,it will opt to do nothing. If one assumes that only immediate absolute gains matter,the game is,frankly, boring.Even if Target suffers much greater costs than Sender,Sender cannot credibly threaten coercion,because it will always prefer to back down and incur fewer 6 Another variant could be that Sender implements sanctions and threatens to keep them in place unless Target meets its demands. 7The results do not change appreciably if Sender and Target place different values on the demand.a demand (D), attached to a threat of economic coercion.6 It might represent a shift in Target's policy on an international issue, a shift in one of Target's policies toward Sender, or a change in one of its domestic policies that has international ramifica￾tions. The demand is an action that hurts the target regime and benefits the sender regime. Note that the sender can calibrate the size of its demand; this decision is endogenous to the game. If Sender chooses to make a demand, then Target must decide between backing down and standing firm. If it chooses to back down, the outcome is Acquiescence (AQ); Target agrees to Sender's demand. If it chooses to stand firm, however, Sender has the last move. It could choose to back down and accept the Status Quo (SQ), or carry out the threat of disrupting economic exchange, which produces an outcome of Deadlock (DL). The Deadlock outcome means that Sender disrupts some bilateral economic exchange. This could include suspending aid, imposing trade barriers, freezing financial assets, or reducing investment flows. This action would obviously be painful to Target, and presumably painful to Sender. The opportunity costs of such an action would be the scarce resources needed to compensate for the interrupted exchange. Small opportunity costs imply that the costs of substitution are low (i.e., low levels of asset-specific investment). The Deadlock outcome is essentially a stalemate; Sender and Target both incur costs, but Target makes no concessions. Figure 1 also shows the payoffs for each outcome. All of the payoffs are relative to the Status Quo outcome. Sender and Target payoffs in the Status Quo are normalized to zero. Status Quo Ante produces the same outcome, plus a small increase (a)for both actors. The difference between SQ and SQA is that Sender's threat temporarily freezes the bilateral relationship, preventing further increases of trade or investment. Even if the threat is not carried out, the crisis is sufficient to cast a pall on the economic relationship. Acquiescence also delivers the Status Quo pa offs, but there is also a direct transfer; Sender gains and Target loses the demand D.4' Finally, the Deadlock outcome disrupts the bilateral relationship. Both actors suffer costs from the loss of economic exchange. Sender and Target receive penalties of -c(s) and -c(t), respectively. If the sender and target countries cared only about their short-run absolute benefits, backwards induction produces a unique outcome. Sender, cfioosing be￾tween backing down or standing firm, will always back down; it will prefer the benefits of continued economic ties to the costs of economic disruption. That is to say, 0 > -c(s). Moving backwards, Target, at its decision node, knows that Sender will back down. Therefore, its strategic choice is between acquiescing to Sender's demands, or standing firm and reaching a Status Quo outcome. Since Target must concede in an AQ outcome, it will always prefer the Status Quo payoff and elect to stand firm. Finally, Sender must decide between doing nothing and arriving at Status Quo Ante, or making a threat and reaching the Status Quo. Because Sender always prefers the additional benefit from the SQA payoff, it will do nothing. Therefore, if one assumes that Sender and Target care only about their own payoffs, the unique equilibrium of this game is Status Quo Ante. Because the sender will not prefer to carry out a costly threat, it will opt to do nothing. If,one assumes that only immediate absolute gains matter, the game is, frankly, boring. Even if Target suffers much greater costs than Sender, Sender cannot credibly threaten coercion, because it will always prefer to back down and incur fewer 6 Another variant could be that Sender implements sanctions and threatens to keep them in place unless Target meets its demands. 7 The results do not change appreciably if Sender and Target place different values on the demand