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Altered Material Payoffs. One of the important insights
of economists who pioneered the early interdependence
literature was that economic policies
adopted in one country can have economic effects elsewhere,
with profound consequences for policy making
(Cooper 1968). These insights informed a generation
of political economy work concentrated on issues of
macroeconomic policy coordination among the major
economies (Hamada 1985; Iida 1999).
International markets for goods and especially for
capital are the conduit for policy interdependence in
these models. Here we focus on competition among
policy makers to attract capital and international business
generally as a means to enhance aggregate economic
growth (Stockman and Hernandez 1988). Policy
liberalization in country A may make it a relatively
more attractive venue for investment or conducting
commercial relations. Indeed, economists have stressed
that capital and trade respond positively to the signal
that policy liberalization sends (Bartolini and Drazen
1997).When a country’s foreign competitors liberalize,
traders and investors are drawn to locations where they
can do business more freely and securely. Anticipating
this outcome, countryBmay feel competitive pressures
to match its rival’s liberal policy. This phenomenon sets
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