Pecuniary Externality, Ideology and Sphere of Influence

Abstract

We build a game-theoretic model to formalize Kindleberger's (1996) idea of the public good of leadership. Two superpowers use ideology to compete for influence by forming clubs whose members benefit more when their orientations are closer to the club's. Pecuniary externalities create complementarity among non-superpowers. Their collective agency forces superpower to compromise by choosing an orientation not aligned with its own. We find that superpowers compromise most when expanding their clubs but less as members become more dependent. Moreover, increased member endowments do not always enlarge the club; disproportionate growth by a few can instead contract it.