International agreements, economic sovereignty and exit

Abstract

We develop a model in which realisations of an ex ante uncertain domestic policy environment can make it attractive to a sovereign nation to renege on an international agreement. We show, in a fairly general setting in which the likelihood of exit is affected by the degree of cooperation, that the possibility of exit reduces the optimal degree of initial cooperation. “Full” cooperation will never be optimal, and the optimal degree of cooperation will never be such as to “squeeze out” any possibility of exit. However, an increase in global uncertainty may imply an increase in cooperation when exit risks are already large to begin with.