In Favor of Entrenchment Justifying Geoengineering Research in Democratic Systems Samantha M. Koreman Dartmouth College Author Filippo Zinni Lori Kohen Antonio Almazan Editors Fall 2019 Download full text PDF (10 pages) Abstract This paper critically evaluates the ability of structurally democratic governments to address long-term, existential problems such as climate change using the example of geoengineering. The solution to these problems is to curtail strict democracies and, instead, entrench the right of future generations in valid constitutions. Theoretical Framework Climate change is a problem that harms current generations and that will continue to harm future generations. Current generations are harmed as a result of changing temperatures, rising ocean levels, and unpredictable weather patterns. Future generations will experience much more severe effects. Most ethical theories acknowledge that individuals have some obligation to future generations. Unfortunately, this acknowledgement does not always translate into the field of political theory. Because of moral facts about representation and non-moral facts about the motivation that individuals have for stepping foot in the political arena, current democratic political institutions are ill-equipped to implement policies on behalf of current generations. This is a serious problem when it comes to solving for the harms caused by climate change. One potential solution to climate change is geoengineering—the new realm of “deliberate large-scale intervention in the Earth’s natural systems to counteract climate change.” However, democracy has difficulty justifying this solution. In order to rightfully implement long-term climate change solutions like geoengineering research, it is necessary for democratic political institutions to entrench the rights of future generations in their constitutions. This paper will first establish a two-pronged problem for democracy. Then, it will apply that problem to geoengineering. After addressing potential solutions to the geoengineering dilemma, this paper advocates for entrenching the rights of future generations into a democratic constitution as a solution for the two problems discussed in the first two sections of the paper. Finally, this paper addresses multiple counterarguments to entrenchment and concludes that entrenchment is, in fact, a viable solution to justifying geoengineering research in the policy arena. I. A Problem for Democracy If we assume that we have some obligations to future generations, then it is necessary to solve a two-pronged problem for dealing with claims of intergenerational justice in modern democratic societies. Although some people claim that democracy has many benefits related to the idea that citizens get to have input in important political decisions through electing representatives and voting on specific policies, a major downside of the democratic procedure is that on a purely structural level, it is ill-equipped to solve long-term problems. The first prong of this democratic dilemma is that procedural accounts of representative democracy require that representatives be responsive to their constituents. This occurs through voting and tests of public approval. Neither of these methods allow representatives the leeway to directly make decisions on behalf of future generations as future generations are not the constituents of political representatives—as they do not yet exist. It is impossible for future generations to elect representatives or even have any measurable approval or disapproval for current policies. For policies with long time horizons, it will only be after the policies are implemented that future generations will weigh in on whether they approve of said implemented policy. This concern over time horizons establishes the second prong of the problem of integrating concerns about intergenerational justice in democratic procedures—because representatives want to be elected and maintain high approval ratings, they will often choose to focus on short-term projects. These short-term projects are policies that current people prioritize in their day-to-day lives. While this prong is an issue in general for democracy’s ability to pass policies that address long-term problems, it is especially problematic in the case of policy concerning climate change. While many people are in favor of addressing climate change, they rarely vote for a politician based on a policy to address climate change. Even if a small portion of the population did vote in this manner, it would still be difficult for policymakers to collectively act to pass policies that mitigate climate change as they need to cater to all constituents. For example, as in the case of America’s coal industry, politicians will often advocate for investing in economic advances that lead to increased resource use. One might have an easy answer to this and say that politicians can simply invest in decoupling in order to satisfy both current and future peoples. However, this two-pronged problem is not so easily addressed in cases where these sorts of justifications for certain environmental policies in a representative democracy reach counterintuitive conclusions that run in opposition to the interest of current people. II. The Dilemma of Geoengineering If we are to accept the context above claim that democracy is unable to establish a stable obligation to future generations, then a dilemma regarding geoengineering becomes apparent—geoengineering research to “arm the future” is unjustified and undesirable while actually implementing geoengineering is justified. Current geoengineering research focuses on the possibility of manipulating the Earth in such a way as to mitigate—or, hopefully, to solve for—the effects of climate change. While there are many proposals in the scientific community regarding specific forms of geoengineering such as injecting sulfate aerosols into the Earth’s atmosphere to increase the Earth’s albedo and decrease the Earth’s temperature, all forms of current geoengineering research are affected by the dilemma of democratic procedure. There exists an important higher-order claim in discussions of policy justification that the rationale for certain advocacies and the way that those rationales interact within an overarching political framework is important for determining the extent to which policies are justified. Proponents of geoengineering research often make the argument that even if our current population is not in favor of actually implementing geoengineering, it is important to “arm the future” with the information needed to implement geoengineering if future generations are put into a position where they must implement geoengineering for their own survival. Contrastingly, a rationale for implementing geoengineering does not categorically ignore the overarching context of democracy. An argument of this sort could proceed in the following fashion: current people are being harmed as a result of climate change. Constituents also have an interest in mitigating climate change. There has already been substantial research into geoengineering policies that prove it is both feasible and cost-effective. Therefore, there is a justification for politicians to support the implementation of geoengineering to benefit current people. This is not mere conjecture—in recent memory, members of the Environmental Protection Agency in the United States have lobbied for funds for real-world geoengineering testing and testified to congress proclaiming the wonders of geoengineering. Members of the Trump administration and high-level Republicans have publicly advocated for geoengineering as a method of solving for climate change and some pundits claim that their reason for doing this lies in protecting the interest of constituents in the oil industry. Current people have an interest in implementation and would benefit from a successful deployment of, for example, stratospheric spraying—the introduction of “small, reflective particles into the upper atmosphere to reflect some sunlight before it reaches the surface of the Earth” would act as a way to almost immediately decrease the temperature of the planet and mitigate the current effects of climate change. The question then becomes why politicians have not made more of an attempt to secure funds to create a real-world test for geoengineering. The answer is deceptively simple—people may not like climate change, but they also do not like the idea of messing with the environment or they believe that there exists a slippery slope in geoengineering, potentially leading to continued adjustments of the environment. While public opinion might be in favor of the idea of researching geoengineering, they are wary of implementation. III. One Potential Response to the Geoengineering Dilemma One might claim that interest in geoengineering research within the current population is reason enough for politicians to advocate for it. This is not a categorical solution—it is only contingent on the beliefs of current people and those beliefs could change. If geoengineering research proved to be useful and effective, it might be the case that current people would lose interest in its novelty. Support for policies can fade, and in the case of climate change it would be a mistake to let solutions be determined solely by what could be transient interest. If one accepts that a successful implementation of geoengineering will take time, resources, and extensive research then it can be argued that choosing to stop researching geoengineering is a harm to the future generation that requires that research for its survival. IV. Addressing the Democratic and the Geoengineering Dilemmas Up until this point, this paper has put forth two problems—democracy’s two-pronged dilemma and the geoengineering paradox. The two-pronged dilemma states, first, that democracy does not have a structure to address the interest of future citizens and, second, that it is ill-equipped to work on long-term projects to address long-term issues. The geoengineering paradox has been presented as an application of democracy’s two-pronged dilemma and states that democracy justifies implementing geoengineering but not researching it. If one accepts these problems and believes that we have some obligation to future generations, then a solution is needed. A solution to democracy’s two-pronged dilemma and the geoengineering paradox is for democratic states to entrench the rights of future generations in their constitutions and laws using legal language that requires policymakers to maintain a certain element of respect for future generations. This would entail positively affirming that human rights extend to the future. Ideally, this entrenchment would be flexible and focus on ideals of intergenerational equality—it would prioritize the interest of future generations to maximize their ability for free choice and maintain a standard of living that is at least at the median of the standard of living of current generations. The content and interpretation of the entrenchment of the rights of future generations is somewhat variable, but the benefits to entrenchment are multifold. First, entrenchment would allow policymakers to permissibly make decisions in the interest of future generations and avoid the first prong of the democratic problem. It would provide a structural justification for pursuing policies beyond that which can be justified by an obligation to be responsive to their constituency. Although future generations still cannot express approval or disapproval for current policies, a policymaker has reason to virtually represent their interests to the best of their ability. The second benefit is also clear—entrenchment solves the second prong of the democratic problem. Entrenchment provides a constitutional obligation to give care towards future generations and take on long-term projects. Even in cases where short-term projects might support a bid for reelection, policymakers must consider whether these short-term projects conflict with the rights of future generations. A practical example can be seen in a political debate on whether to invest in jobs in coal or green energy. Although coal jobs might have some small, short-term benefits to a single politician’s constituency, it would be impermissible to make a conscious choice to support an industry that has the ability to exacerbate environmental harms. Instead, the politician might advocate for investing in renewable energy and training programs to transition coal miners to work at a new renewable energy plant. In cases where there are geographic concerns about the feasibility of renewable energy, the burden of the politician would be to determine whether any industry practices could be changed in order to improve the sustainability of the local coal plant. Entrenchment implies consideration of the future rather than a categorical prioritization of interests. Third, and most relevant to the geoengineering dilemma, entrenchment allows for there to be an overarching political context that legitimizes the rationale for research in the name of “arming the future.” It allows politicians to support geoengineering research even in the context where the benefits of the policy will not be realized for decades-long after their time in office is done. It represents fulfilling a contractual obligation. If a politician were to propose a policy that would violate the constraints of entrenchment, then she would be liable to something like impeachment. Impeachment acts as a way to punish politicians who break laws. As entrenching the rights of future generations would be akin to proposing a law constraining conduct, the violation of entrenchment would be a violation of the law. This would give individuals and structures within the government the ability to impose sanctions on those policymakers who would seek to disrespect future generations. V. Responding to Potential Objection to Entrenchment Even if one accepts that entrenching basic rights for future generations addresses democracy’s two-pronged dilemma and the geoengineering dilemma, there are still a few powerful objections to entrenchment. A. Entrenchment is Undemocratic One could make the argument that any entrenchment of any value into a constitution is undemocratic as it could constrain the ability of policymakers to be responsive to their constituents. Values that are entrenched in a constitution—a document made by one group of people that often continues on to future generations—do not always represent the views of current people. To entrench the rights of future generations in a constitution would be to impose values on future generations; something inherently undemocratic. This is a relatively weak argument for two main reasons. First, entrenchment in this case is something that allows for procedural fairness and respects democratic tenets of equality. If one was a proponent of democracy, then she would advocate for both of these features as prerequisites for a democratic process to take place. Second, and most powerfully in the context of this paper, entrenchment explains the reason that the paradox of geoengineering exists. People often recognize respect for future generations as a value that they either have or ought to have. Although they themselves may disagree with implementing geoengineering, that does not mean that they categorically want to take that choice away from others. Although democracies do not necessarily need to possess liberal values, they often do because of concerns about fairness and equality. In order to ensure that future generations maintain an ability to choose, it is necessary to implement certain political protections against current generations unknowingly limiting the options of future generations. B. An Epistemic Worry One more powerful objection to entrenchment is the notion that current people do not even know what is in the interest of future people. After all, one of the benefits of democracy is that people can voice their own interests and concerns to policymakers. Future people cannot do this as they do not yet exist. Norms and values change over time, and opinions about policy can often be shaped by these changes. Apart from a concern about what interests future people will have, there may also be a second, purely epistemic worry that consists of something akin to the following: we cannot know what the future holds with any certainty, and we cannot make policy to address problems that we do not know about. Therefore, any policy to help the future will rely on incomplete information. First, this epistemic question applies to current people too. If individuals do not vote, policymakers are still tasked with considering them in their decisions. We do not say that they have done something wrong if policymakers make an imperfect decision—we only say they made a mistake when the decision they make directly violates the rights of those people who are not their constituents. For example, a decision to invest in infrastructure in one town that 40% of the town refrained from voting on. That by itself is not a problem. If the infrastructure investment requires bulldozing the home of someone who did not vote for this plan, then that person could say that her personal rights were disrespected and the policymaker did something wrong. Second, certain interests have remained the same. Basic goods that are key to survival are a prerequisite for having higher order interests, interests that relate to ethical determinations of what a good life would entail. In terms of higher order interests, “although moral variety undoubtedly exists, it is less extensive than is often supposed…[as] commonalities define the distinctively human forms of life.” Certain interests are human interests, and entrenchment focuses on the consideration of these interests. Even if one disagrees with the idea that there can be one common conception of the “good life” as espoused by the Skidelskys’, approaches of determining a good life based on what a rational individual would want or what capabilities we wish individuals to have also require attention to ensuring basic goods. Basic goods are “in general necessary for the framing and the execution of a rational plan of life” and capabilities require asking “what is so-and-so able to do and be?” Food, clean water, and shelter are all requirements for safe living, and all of those requirements are threatened by climate change. Third, in terms of the specific policy of “arming the future” with geoengineering research, current people are not telling the future what to do. Instead, current people would be maximizing the choices that the future can make by providing them with information. Entrenchment as a justifying account of why it would be permissible to “arm the future” does not entail an epistemic overreach as no decision is being made; the future does not need to use the information that they would be given. They have the freedom to refuse to implement geoengineering if they do not believe it is what is best for them. Finally—to address the purely epistemic worry that nobody can predict the future on a policy level—it is important to recognize that it is likely the case that climate change will pose an existential risk to some future generation. Although it is always difficult to calculate epistemic uncertainty, it is plausible to say that we are relatively certain that if climate change is currently affecting people, it will likely affect future people as well. It is also worth noting that in our current democratic system, policymakers do recognize climate change as an existential risk to future generations and often act in the international arena to combat it like with the Kyoto Protocol or the Paris Accords. C. Prioritizing the Present Another strong objection to entrenchment is the worry that policymakers would be prohibited from prioritizing the present. If there are side constraints against harming the future, policymakers may feel like they either cannot make any decision or can only make decisions that benefit the future for fear of being impeached for shirking their duties to the future. First, this misunderstands the goal of entrenchment. Entrenchment states that there is a prohibition against harming future generations with current policies. It prohibits policymakers from ignoring future generations in their calculations. It allows policymakers to permissibly take action that benefits future generations without someone claiming that they are shirking their obligations to the present. It does not state that policymakers should only prioritize future generations; it simply places a side constraint on what sorts of policies can be permissibly implemented. We still may not harm the present with our policies. Second, stating that a certain group has rights that should be protected does not imply that the current generation does not have rights. Entrenching the rights of future people does not take away the rights of current people. Certain policies might prioritize future people over current people, but in the case of justifying climate change policy that is not the case,especially when it comes to geoengineering research to “arm the future.” Third, to address the worry about undue prioritization in regard to taxation, there is a mistake in assuming that geoengineering research does not benefit current people. Scientific research has numerous fringe benefits. It benefits scientists and educational institutions in terms of providing funding and jobs as well as attracting new talent. Furthermore, there is no guarantee that an individual’s taxes go towards something that will benefit her in specific terms. If someone agrees to exist within the bounds of government and pay taxes, she agrees to pay for a set of government services rather than a specific service. There is no real mechanism to withhold a person’s taxes from being used towards services that do not directly benefit her as money is fungible. Finally, a worry about considering the interests of future people is akin to worrying about the interests of current people. A democratic system gives everyone input into the decision-making process, but equality of input does not entail that everyone’s input will be included in the final decision. Consideration of future interest does not imply that those interests will always override current interests; it is the job of policymakers to make reasoned decisions rather than a problem with entrenchment. To this final response, there is a separate worry, namely the way that democracy often considers interests is via some majority rules system. It is because of this that there can exist a tyranny of the majority where the interests of the minority are systematically discounted. If consideration of future people is meant to mean that policymakers are to consider each of the votes of the infinite future people, then it may mean that in a democratic system would always side with the infinite future people because they numerically outweigh current people. This interpretation of entrenchment is a mistake. First, consideration of basic interests does not require counting individual votes as the interests remain the same and simply act as a constraint. Second, side constraints on what policymakers can permissibly vote for exist in our current system in order to curtail the harms of the tyranny of the majority. While individual policies can fall into the trap of the tyranny of the majority, policymakers do not have the right to infringe on the basic rights of the minority. VI. Conclusion If one wishes to justify funding geoengineering research to “arm the future,” then it is necessary to solve democracy’s two-pronged problem and address its relationship with the dilemma of geoengineering. While policymakers have the ability to make any law, it is important that the laws they create are justified by a broader framework. By entrenching the rights of future generations to basic necessities that would be harmed by climate change, policymakers would have a codified reason to invest in policies that can “arm the future” with information about how to quickly counteract climate change. Works Cited Gardiner, Stephen M. “Is ‘Arming the Future’ with Geoengineering Really the Lesser Evil?” Climate Ethics. Oxford University Press, Oxford, UK, 2010. Keith, David. A Case for Climate Engineering. MIT Press: Cambridge, MA, 2013. Keith, David W. “Toward a Responsible Solar Geoengineering Research Program.” Issues in Science and Technology. National Academies of Sciences, Engineering, and Medicine: The University of Texas at Dallas, Arizona State University, 2017. Lukacs, Martin. “Trump presidency ‘opens door’ to planet-hacking geoengineer experiments.” The Guardian, 27 March, 2017. www.theguardian.com/environment/true-north/2017/mar/27/trump-presidency-opens-door-to-planet-hacking-geoengineer-experiments Oxford Geoengineering Programme. “What is geoengineering?” University of Oxford Martin School. 2018. www.geoengineering.ox.ac.uk/www.geoengineering.ox.ac.uk/what-is-geoengineering/what-is-geoengineering/indexd41d.html Skidelsky, Edward and Skidelsky, Robert. How Much is Enough?: Money and the Good Life. New York, NY, 2012.

A.S.E.A.N The Long Game: ASEAN, China’s Charm Offensive and the South China Sea Dispute Hisyam Takiudin Brown University Author David Golden Orwa Mohammad Sean Sullivan Editors Spring 2018 Identifying why multilateralism is weakening in Southeast Asia in the wake of the South China Sea Maritime Dispute. The South China Sea (SCS) is a 3.5 million-square-meters body of water within the rims of Southeast Asia. It contains islands, reefs, and low-tide elevations that are mainly grouped into the Spratly and the Paracel Islands. The SCS is of strategic importance as it is a trade route carrying $3.4 trillion worth of goods every year – an equivalent to 21% of global maritime trade – and boasts strategic sea lanes whose blockade could disrupt entire economies (O’Rourke, 2015). Recent studies estimated the SCS to contain 11 billion barrels of oil and 190 trillion cubic feet of natural gas (Fisher, 2016). It also accounts for over 10% of the global fishing trade. While its value is undisputed, determining who owns what in the SCS gets very complicated. There are overlapping claims between China, Japan, Taiwan, and several Southeast Asian states which has led to military standoffs, international court arbitrations, as well as disruptions to revenue-generating activities in the waters (O’Rourke, 2015). To understand the root causes and find potential solutions to the SCS dispute, this paper argues a focus on two key players: China and the Southeast Asian states. Beyond China’s lofty ambitions to become the de facto power center in the region, there needs to be a consideration of China’s modus operandi. In July 2016, the Permanent Court of Arbitration (PCA) rejected China’s ‘nine-dash claim’ in the SCS. China responded by discrediting the ruling and continuing to assert its claims by adding sediments to low-tide elevations to build artificial islands, chasing out non-Chinese vessels, and engaging in military exercises (Fisher, 2016). This is a precedent-setting behavior, and the potential for additional players to follow the same law-defying strategy should sound an alarm for increased checks on Chinese influence in the region. More explicitly, other SCS claimants should create a more united front with the collective goal of upholding international law. Secondly, Southeast Asian states technically operate within a regional bloc called the Association of Southeast Asian Nations (ASEAN). ASEAN is primarily an economic bloc, but that is precisely why it is crucial to solving the dispute. A study of the economic relationship between the claimants in the dispute reveals a two-faced nature. There is a clear pick-and-choose strategy by more developed claimants (e.g. China, Japan) towards Southeast Asian states which are largely emerging markets. Capital flows can thus be an influencing instrument by more developed claimants to steer negotiations in their favor. The Southeast Asian claimants then could benefit from a more integrated economic strategy via ASEAN to ensure a level playing field. The question that remains then, why has the status quo persisted? Why is it that seemingly logical strategies such as the above not followed? Perhaps more constructively, what incremental steps are realistic and feasible for stakeholders to take in line with these big picture strategies? The rest of this paper will expand on the contexts of these observations, use data to justify the need to change the status quo, and outline potential strategies that can maximize the long-term outcome for stakeholders. The core argument will be this: a combination of ASEAN’s flawed structure, inefficient nature of international law, and the economic-incentive dependent nature of ASEAN claimants all lead to a political scenario where free-riding on other parties’ confrontations with China while reaping China’s economic incentives will bring about the best individual outcome. This is what is called a collective action problem, a Marcus Olsen (1965) notion that stresses the inability for individual actors to achieve a goal in providing a public good – in this case, a buffer against Chinese bullying (Oatley, 2016). There is then a recognition of a larger Chinese strategy to dismantle ASEAN and to shift Member States into China’s sphere of influence. Solving the SCS conflict is then not quite the priority ASEAN Member States should be giving. ASEAN as an organization is an important medium to balance against China’s creeping influence, and its Member States will need to see past the short-term benefits of China’s handouts and consider the long-term consequences of the current free-riding strategies. This paper will reveal how following a long-term strategy focusing on building ASEAN’s internal capabilities can be instrumental to maximize individual interests while ensuring China’s actions are checked. I. ASEAN and the SCS Dispute ASEAN is a regional bloc consisting of 10 Southeast Asian states and aims to promote economic, political, and security cooperation amongst its Member States. Its biggest achievement is first and foremost its ability to rally an economically, politically, and culturally diverse group of nations. By promoting regional dialogue, ASEAN, in turn, promotes regional peace and stability, a no easy feat for a group of post-colonial states (except for Thailand). However, it is important to note that in practice, ASEAN focuses on economic cooperation more so than others. This is because ASEAN decision-making is on the basis of consensus, meaning the controversial nature of political and security cooperation is by default constrained. While ASEAN managed to eliminate significant amounts of trade tariffs, no military agreements have been signed beyond joint exercises or on matters of illegal migration between its Member States. In context of the SCS dispute, the most important fact is how ASEAN as an organization has never been mandated to resolve the dispute; this responsibility falls under the claimants themselves “through legal arbitrations or political negotiations, bilaterally or multilaterally,” (Storey, 2017). In a rare exception, however, ASEAN and China did sign the non-legally binding Declaration on the Conduct of Parties in the South China Sea (DOC) in 2002, which entails the promotion of “confidence-building measures”, engagement in “practical maritime cooperation”, and “the discussion and conclusion of a formal and binding Code of Conduct (COC).” The COC is intended to be a formal, legally binding document that would facilitate maritime engagements in the SCS. The signing of the DOC is a remarkable achievement because it also acts as a litmus test for ASEAN’s ability to act as a political unit. The decision to partake in the COC negotiations is in line with China’s current charm offensive strategy in the region –explained further in Section IV, but negotiations have been significantly delayed, so much so that even the basic provisions of non-violence and non-disruptive clauses in the DOC have not been implemented (ASEAN, 2012). The DOC also created the opposite of its intended effect: creating distrust and discouraging further cooperation. This is because the DOC lacks an enforcement mechanism, leading to rampant and unchecked interpretations, where claimants have accused each other of violating the document (Storey, 2017). China sees the Philippines’s decision to take up the case to the PCA violates Article 4 which stipulates conflict resolution “through friendly consultations and negotiations by the sovereign states directly concerned”, while other claimants see China’s sand dredging to build islands fit for military use do not exemplify an act of “self-restraint” (Storey, 2017). It was not until September 2013 – a full eleven years since the DOC was signed – when the first China-ASEAN Senior Officials’ Meeting on the COC was held (Storey, 2017). Talks remained slow until after the 2016 PCA ruling, in a move believed to be China’s way of deflecting criticisms it received from rejecting the Tribunal’s result. More strikingly, the draft contents of the COC, as of November 2017, is devoid of the term “legally binding”, raising doubts whether countries should be invested in the COC at all (Storey, 2017). Even if the final version of the COC does come with a binding clause, a few things are still worth noting. First, the insistence to take time to negotiate could mean the region remains at risk of violent escalations – there is an immediacy to have the COC passed soon considering the ongoing military installations by China and Vietnam. Secondly, the COC will not mean an end to the dispute since it will not include mechanisms aimed to do so –it will not be equipped to resolve existing conflicts. Most importantly, the DOC experience and China’s precedent-setting decision to ignore the PCA ruling calls for caution whether signatories would even honor it. Internally, cracks in ASEAN solidarity towards the SCS dispute are becoming clearer. In 2011 the ASEAN Summit failed to issue a joint statement on how to approach the dispute and in 2017, it failed to mention the dispute altogether (Hutt, 2016). President Duterte of the Philippines made the surprise move to set aside the PCA ruling – in which the Philippines was overwhelmingly favored – and strengthened ties with China through trade deals worth $13.5 billion (BBC, 2016). Malaysia held joint military exercises and signed big budget infrastructure projects with China (Permal, 2017). Vietnam, on the other hand, is in a ‘cold war’-like state with China, with both parties actively participating in reclamation efforts in the region. Vietnam has also increased strategic cooperation with the United States and Japan who both condemn China’s activities in the region, further increasing tensions (Ives, 2017). The final twist: apart from Singapore, other Southeast Asian states remained quiet on the matter altogether. The key observation here is how increasingly divergent individual ASEAN states are towards the SCS dispute. As per above, the spectrum ranges from outright confrontation to normalization and all the way to blatant disregard of the issue altogether. All things considered, it seems a balancing-against-China strategy is no longer a possibility – a clear indication of the collective action problem discussed earlier. Why then, should any stakeholder in the dispute care about ASEAN? Would it not be more productive to shift the conversation towards the maximizing the interest of an individual claimant? The following sections will peel away these questions to arrive at a two-fold argument: 1) disregarding the importance of a regional Southeast Asian strategy undermines the relevance of ASEAN as a regional bloc, and 2) ASEAN is an instrumental medium in limiting China’s questionable and precedent-setting actions in the region. II. Why Bilateralism (and Limited Multilateralism) Is Preferred To understand why and how ASEAN’s relevance could be compromised, we need to look at both internal and external factors guiding ASEAN’s current principles, and then tie these to how they play to China’s best interests instead of the ASEAN region. Internally, the baffling puzzle is why has Southeast Asian multilateralism in solving the SCS dispute been limited to the flawed DOC and COC. A good way to study this is to deep dive into why bilateralism is heavily preferred. On a surface level, the obvious explanation is because not all ASEAN states are involved in the conflict. Only five Southeast States are technically involved in the dispute – the Philippines, Vietnam, Malaysia, Brunei, and Indonesia. Others are either more involved in territorial disputes with each other or are geographically irrelevant to the dispute. As Section IV will argue, it may well be the case that there are strong incentives for individual states to maintain an amicable relationship with China. Still, what this argument does not explain, is why individual ASEAN states refuse to forgo these incentives for the greater good of the regional bloc, especially in light of China’s devious actions in the SCS. One explanation could be how bilateralism has worked to solve past disputes in the region. When oil and gas reserves were found in the 70s, the Philippines moved in first in 1976, establishing a commercial field in the Reed Bank near its Palawan Island. This received strong opposition from China, Taiwan, and the newly reunited Vietnam, who all claimed the Reed Bank to be within their territories (Muscolino, 2013). Bilateralism took center stage, with each claimant stressing the importance of a peaceful resolution. Negotiations with each claimant avoided escalations for the rest of the decade (Muscolino, 2013). More recently in 2008, Malaysia and Brunei agreed to resolve their dispute by demarcating the land and maritime boundaries, while also collaborating in the exploration of hydrocarbon resources. These became resounding evidence amongst ASEAN leaders that bilateralism could prevent escalations while still maximizing the interests of all parties involved (Roach, 2014). The preference for bilateralism is perhaps better explained by the oddest feature for a regional bloc: a non-interference policy where member states could not interfere with the affairs of another. In context of the SCS dispute, it effectively means that there are no binding mechanisms for the more confrontational Vietnam to coerce the more pro-China Malaysia into shifting its policy stances, for example. The non-interference policy is a result of a shared trauma from colonialism (9 out of 10 ASEAN states are former colonies), with the idea of self-governance becoming a centerpiece when state leaders signed the ASEAN Bangkok Declaration in 1967 (Molthof, 2012). It means there is a heavy reliance on political goodwill for any regional level cooperation to work. It is not surprising then, that the multilateral-centric strategies outlined earlier in this paper remain unrealistic under current conditions. A united front between ASEAN states on the SCS dispute will first require internal disagreements to be solved, which will require a regional supranational body that could fairly rule over the overlapping claims. Amassing enough political goodwill to do this considering the already contentious internal maritime politics is nearly impossible. The practical short-term solution then, as per evidenced by current strategies, is to rely on micro-level, government-to-government negotiations. III. The Role of International Law The second dimension that explains the Southeast Asian states’ current strategy is the complications brought about by international law. The earlier discussion on the DOC and COC was only one part of the legal dimension in the SCS dispute. The United Nations Convention on the Law of the Seas (UNCLOS), intended to mitigate disputes over maritime claims such as in the SCS, exacerbated the situation in the region. This is a two-part issue: 1) vagueness in UNCLOS language allows for different interpretations, and 2) opt-outs from arbitration processes defeat the mechanisms that could have overcome the vagueness. For there to be a universally recognized dispute settlement mechanism, there also needs to be a universally recognized set of definitions for what is being disputed. UNCLOS stipulates legal definitions for the rights of states over waters beyond their shore, most controversially the provision of Exclusive Economic Zones (EEZs). It legally gives states the right to exploit resources 200 nautical miles off their shores (The Economist, 2012). There was no practical need for this beyond an incentive for states to sign onto UNCLOS, and that short-term incentive backfires. There is a two-part implication: 1) the importance of owning physical features in the SCS becomes of a strategic importance since EEZs establish a sizable control over a revenue-generating region, and 2) signatories regardless of size and military strength are now able to join in the conversation, which is good, but convolutes the already messy conflict by adding more players to the mix. Note also that Southeast Asian states are primarily emerging markets, and the opportunity to reap benefits from riches of SCS can be vital growth drivers. There is also a more patriotic perspective to this; states could also be pursuing purely nationalistic campaigns to enforce historical claims. The Singapore-Malaysia dispute over Pedra Branca and China-Japan dispute over the Senkaku Islands are prime examples. Irrespective of what motivates the states to enter the dispute, the demarcation process would be delicate as the SCS outlines the shores of at least nine states. Even so, a fair and peaceful delimitation of boundaries would be possible if the arbitration process is thorough all the way to the enforcement stage. This is unfortunately not the case with UNCLOS. Article 298 in UNCLOS gives signatories the option to be excluded from arbitrations of “sea boundary delimitations”, “military activities”, and those within the allowable functions of the Security Council (United Nations, 1982). This clause is effectively an ‘opt-out’ from the very legal proceedings UNCLOS was built for. It allows UNCLOS signatories to circumvent the accountabilities that come with violating the document. China, as expected, opted out of Article 298, giving it the legal backing to not have to act on the 2016 PCA ruling. Consider Section II’s discussion on ASEAN states’ preference towards bilateralism. Government-to-government negotiations can be effective if and only if both sides agree to make themselves accountable to the outcome of those negotiations. Once this accountability becomes optional, it begs the question whether it is still wise for ASEAN to rely heavily on bilateral talks. Another way to put it, what are the consequences of ignoring the apparent systemic flaws in the way ASEAN operates? IV. China’s Golden Paradise A good way to understand the full consequences of the systemic flaw referred in the previous section is to study how that flaw has been used against ASEAN. Again, China is a key player here. With ASEAN preferring bilateralism over multilateralism, there is an opportunity for China to tailor its strategy to individual ASEAN countries. Furthermore, with non-interference policy in full effect, any bilateral relationship an ASEAN country builds with China cannot be questioned even if that relationship adversely affects ASEAN as an organization. While this may not necessarily be the case, it will be argued that China’ current strategy suggests it may be pursuing a Southeast Asian political realignment to Beijing. On ASEAN’s part, with its Member States focusing on building a closer relationship with China, there exist trade-offs in capacity building an already fragile ASEAN, whose social, economic, and political linkages remain underdeveloped. In context of the SCS dispute, this could mean a chipping away of the very foundation of ASEAN as a potential balancing power. A grimmer picture could be that, in the long term, the very existence of ASEAN may be endangered, should its weak organizing power falter under a Chinese realignment. To capture how this can play out, one needs to first understand how China specifically has come to hold the bargaining chip it currently has. The obvious is China’s economic strength; with a gross domestic product (GDP) of $11.2 trillion (2016), China dwarfs even the that of a combined ASEAN at $2.6 trillion (2016) (Asian Development Bank, 2017). As primarily developing markets, Southeast Asian countries are right to leverage on larger economies such as China or the United States, where injections of investments can help speed up their development process. Nonetheless, China’s economic strength does not explain why Southeast Asian governments are leaning heavily towards China more so than the region’s traditional hegemon, the United States (US). A traumatic colonial experience for most ASEAN Member States towards the West, in general, could partially explain this (Wilson, 2017). More recently in 1997, the International Monetary Fund (IMF)’s unpopular austerity policies in Thailand and Indonesia lead to disastrous results. This tattooed skepticism among Southeast Asians on long-term relationship building with the West, chiefly the US which holds the IMF’s largest voting power. An even more recent development is unrelated to ASEAN public sentiment at all; the United States is seeing a wave of populism that is pressuring both ends of the political spectrum to be more inward-looking. The election of conservative populist Donald Trump as president further solidified that the US may no longer focus on Southeast Asia. The final confirmation was in Trump’s decision to pull the US out of the Trans-Pacific Partnership (TPP), history’s largest regional trade accord (Granville, 2016). The vacuum created by a receding US adds to the already favorable conditions for Chinese dominance in Southeast Asia. All that is left is an execution plan that avoids painting China as another superpower taking advantage of weaker nations. In a 2004 speech, China’s Prime Minister Wen Jiabao made a compelling remark, stating that China’s rise “will not come at the cost of any other country, will not stand in the way of any other country, nor pose a threat to any other country” (Kurlantzick, 2007). This was in the wake of China’s Peaceful Rise strategy, when it realized that its aggressive, military-centric and coercive tactics backfired badly (Kurlantzick, 2007). This is what is called a charm offensive. The strategy draws from a concept political scientist Joseph Nye calls ‘soft power’, “the ability to shape the preferences of others...It is leading by example and attracting others to do what you want,” (Kurlantzick, 2007). To exercise its soft power, China needs to first change the rhetoric surrounding China’s position in Southeast Asia. The turning point was the 1997 Asian financial crisis, where China made the smart move to lessen the devaluations of the Thai baht and the Indonesian rupiah by refusing to devalue its own currency. The decision was publicized as an Asian solidarity measure, which reframed the conversation on China in the region. China’s charm offensive was then timely; it quickly moved to establish relationships with each Southeast Asian country through cooperation in cultural, educational, and business spheres. China invested heavily to improve its diplomatic outreach, visiting its Southeast Asian neighbors twice as many times as its US counterparts (Kurlantzick, 2007). China has also integrated Southeast Asia into its larger plan to create “the world’s largest platform for economic cooperation”, the Belt and Road Initiative (BRI). BRI is an ambitious modern iteration of the Silk Road trade route, and it aims to promote physical, economic, and social connectivity (Jinchen, 2017). China’s $113 billion pledge in infrastructure building along the proposed trade route is a catnip for ASEAN states who, according to The McKinsey Global Institute, need over $2 trillion investments between 2016-2030 “in road, rail, port, airport, power, water, and telecommunications infrastructure across ASEAN to maintain economic growth,” (McKinsey Global Institute, 2016). This is the key dilemma created by China’s charm offensive: there is a clear need to address its questionable actions in the SCS dispute, yet the allure of Chinese economic incentives is at the same time too good to ignore. While China continued to deny any geopolitical agenda behind BRI, two observations seem to imply otherwise: 1) the timing of BRI coincides with China’s increasingly aggressive position in the SCS, and 2) selective awarding of valuable economic packages to pro-China ASEAN Member States, most evidently the Philippines $13.5 billion pledge upon President Duterte's U-turn from the PCA ruling. The latter observation is further supported by a tripling of Chinese investment value in Malaysia between 2014 and 2015, curiously coinciding with Malaysia’s refusal to answer calls by the Philippines’ then-President Benigno Aquino III to stand up to China. This sparks speculation that the fluctuating Chinese investment value in Vietnam is a means of Chinese retaliation towards Vietnamese reclamation efforts in the SCS (Cheok, 2017). Therefore, ASEAN states tiptoe the line between maintaining their sovereignty in the SCS and appearing favorable to China to exploit its generous handouts. On the one hand, maintaining control over geographical features in the Spratlys and Paracels could come with additional revenues through EEZs, but cost-benefit analyses could prove economic ties with China to potentially bring in much higher revenues. At the core of this argument is the fact that the commodities at stake in the SCS are primarily in oil and fishing stocks. Consider the difficulty of extracting oil, its price volatilities, and its grim long-term prospects: in 2016 BP estimated that the global oil reserves will last only for the next 53.3 years. A recent study by the OceanAsia project estimates depletions of up to 59% in key fishery stocks by 2045, putting the value of controlling fishery areas at stake (Sumalia and Cheung, 2015). Even in the potential unsustainability of income streams in the SCS, nationalism is such a big part of ASEAN – evidenced by an earlier discussed non-interference policy– that it begs a closer study on whether economic incentives are all it takes for China to assume a winning position in the SCS dispute. Earlier, it was argued that ASEAN’s non-interference policy creates a collective action problem where strong forms of multilateralism are hindered. This argument is also applicable to ASEAN’s inability to achieve the level of market integration required for a seamless intra-ASEAN trade and capital flows. ASEAN’s single market initiative, the ASEAN Economic Community (AEC), has made way for tariff reductions of 99.2% in ASEAN-6 (Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, and Thailand) and 97.52% of tariff have been reduced to 0-5% in others (ASEAN Economic Community, 2015). Albeit slow, this is a remarkable achievement and signals a strong ASEAN solidarity in spite of its shortcomings. However, a closer look reveals a different story: there is almost a four-fold increase in non-tariff barriers and measures (NTB/NTM) from 1,634 measures to 5,975 leading up to AEC’s launch in 2015 (Zulfakar, 2017). Essentially, while ASEAN Member States markets their tariff reductions as proof of their commitment to ASEAN, the apparent shifting of potential loss of income to NTB/NTM suggests a collection of countries focused on individual economic gains more than Southeast Asia’s collective wellbeing. And by virtue of non-interference policy, ASEAN Member States cannot pressure each other to change their policies, at least not within the ASEAN framework. The inference is that yes, China may have struck gold through its charm offensive strategy. V. A Chinese Takeover – Blessing or Curse? As each ASEAN Member States form a closer bilateral relationship with China, it effectively means China will compete with ASEAN to become the common denominator in the Southeast Asian region. Should it succeed, it theoretically would put the entire region under its sphere of influence. The key puzzle this section will answer is whether a pivot to China would be detrimental to the development of ASEAN. Measuring this will first require a modeling of what a Chinese ‘takeover’ of the region would look like. One way to do that is to look at Member States who are now already highly dependent on China; a good example is Cambodia whose Chinese FDI amounts to 61% of its total FDI inflows. The fascinating aspect of the Cambodian example is that its Prime Minister, Hun Sen, has not always been friendly to China, once calling the country “the root of everything that is evil”. Within twelve years, Hun Sen altered the description to “Cambodia’s most trustworthy friend”. China covered Cambodia’s shortages in aid during a 1997 coup. This has led to an over-reliance on Chinese aid, which in turn prevents Cambodia from doing anything that may irk China. One expert describes Cambodia “as an extension of China’s foreign policy,” (Hutt, 2016). This is proven by the country’s constant blocking of official ASEAN statements on the SCS dispute, all while using the term ‘neutrality’ to justify its position. Drawing a parallel to ASEAN, the Cambodia model could very well be China’s vision for the whole Southeast Asian region. Unlike the European Union (EU), ASEAN’s highest decision-making power remains at the state level, hence the logic should follow that individual Member States’ interests precede regional goals. Therefore, consider the endgame following a Chinese takeover as the region’s de facto common denominator. China’s ability and willingness to fill in investment gaps, the considerations towards ASEAN’s inherent flaws, and the realization that resources in the SCS are unsustainable all points to the perspective that China may be an ASEAN alternative Southeast Asia needs. Beyond the push and pull of power play between China and its Western counterparts, what then, is wrong with Southeast Asia embracing China? For one, several red flags exist in the Chinese brand of regionalism. Firstly, China’s ignorance of the PCA ruling – a rejection of its ‘nine-dash’ claim in the SCS – sets a precedent of disrespect towards the international law. Secondly, there are contradictions in China’s narrative to create a harmonious cooperative environment while at the same time aggressively building up military capacity in the SCS, creating an environment of skepticism and distrust. Last and perhaps most dangerously, China’s support of authoritarian regimes such as in Cambodia and Laos does not bode well for human rights improvements. A Chinese sphere of influence appears to promote norms contrasting to that of ASEAN Member States at large. Should the consensus model remain a feature of Chinese-led regionalism – which it realistically will – the aforementioned norms would not promote healthy intergovernmental relationships. To prove this point, it is appropriate to use game theory to compare Southeast Asian cooperation between ASEAN’s framework and a Chinese-led regionalism. This is because Southeast Asian regional cooperation much resembles cartels seeking oligopolistic profits; the consensus model mirrors a similar decision-making process in a cartel where each firm’s decision could not be questioned by another. Collusion returns a higher producer surplus than a market competition would. In Southeast Asia’s case, economic benefits from free trade agreements (FTA) outweigh trade without barriers eliminated. However, cartels are generally unstable due to strong incentives to deviate. Without going too much into the underlying mathematics, the price or quantities set in a cartel, while bringing overall higher profits to the market, do not follow the best response possible for each firm. This is already happening in Southeast Asia: the AEC’s effort to eliminate trade barriers. Section IV outlined that while ASEAN Member States made significant inroads to eliminate tariff barriers, it was found that non-tariff measures and barriers (NTB/NTM) had in fact increased, signaling a mere shift income stream rather than a thorough elimination. This increase in NTB/NTM is a form of deviation, following obvious calculations that Member States stand to enjoy above average benefits through NTB/NTM while still reaping from the advantages of an FTA. Game theory states that for collusion to be sustainable, it requires for there to be: 1) only a few actors in the cartel, 2) a multi-market competition, 3) a transparent market for detection of deviations, and 4) symmetry between the firms (Policonomics). ASEAN Member States violate three of these conditions. With ten players, an often-opaque regulatory framework that makes detection of NTB/NTM difficult, and diverse economic strengths, from a game theory perspective it makes perfect sense that multilateralism is weak within ASEAN. However, at least within the ASEAN framework, there is a conscious effort – a strong political goodwill – to address the issue of NTB/NTM, so much so that the AEC Blueprint 2025, a 10-year action plan for the area, includes a focused and detailed effort to tackle this very issue (ASEAN, 2015). Consider this case in a Chinese-led regionalism, with the norms of disrespect towards international law and untrustworthy narratives coming into play. In a framework that relies so much on political goodwill, an air of distrust not only discourages cooperation to solve the underlying issue, but it further incentivizes deviations in a cartel-like arrangement. There is the true danger of a Chinese realignment in Southeast Asia. While the short-term economic incentives may be attractive and essential to fill in Southeast Asia’s infrastructure gap, there may be significant losses in economic benefits of an integrated Southeast Asian region compared to a bilateral-focused, Chinese-led model. VI. Moving Forward The previous section provides a strong case for there to be check and balances in China’s charm offensive in Southeast Asia. Analyzing the root causes of the SCS dispute’s prolongation revealed China’s apparent strategy to engulf the Southeast Asian sphere of influence into its own. Any strategy moving forward then must go beyond the SCS dispute; it also needs to address China’s long-term strategy in the region. In a way, China’s charm offensive has been a blessing because it also revealed what needs to be done to counter China’s rise. The crux of the strategy should be to look for economic-incentive driven strategies to encourage multilateralism in ASEAN, thus balancing against China. There are three ways to do this: 1) diversifying FDIs, 2) creating an ASEAN investment distribution mechanism, and 3) capitalizing on state strength to engage in less lucrative, intra-ASEAN investments. For starters, there needs to be a paradigm shift from the hunt of immediate gains that appeals to voters. This refers to China’s hefty financial investments, which, as shown, in states like Cambodia, Malaysia, and the Philippines, had apparent geopolitical agenda behind them. Cambodia especially, perhaps because it has no conflicting interests in the SCS as a landlocked country, is now practically a proxy for China in the region. It was the reason behind the failure for ASEAN to issue joint statements in recent years. With the Cambodian case in mind, the logical step would be for individual ASEAN Member States to be careful not to let China be in a dominant position in any form of monetary assistance. The guiding strategy here is then to diversify the pool of incoming capital, be it in terms of FDI, aid, or trade. There are two ways ASEAN Member States can diversity, by increasing their extra-ASEAN and/or intra-ASEAN sources. In the extra-ASEAN strategy, the impending puzzle would be to find other partners as able and as willing as China in handing out economic incentives. The best alternative is perhaps Japan, another Asian economic power which, despite stagnating FDI contribution to ASEAN, remains the Chinese amount in net terms ($17.6 billion compared to China’s $8.2 billion in net inflows at 2015 levels). What needs to change in Japan’s strategy is the distribution of its investments in the region. Japan’s investments are focused on manufacturing, the largest in the region by far, which does imply that it is playing a role in filling in the infrastructure gap required by the industry. However, Japan’s factories are highly concentrated in Thailand and Indonesia, and are highly insignificant in the CLMV (Cambodia, Laos, Myanmar, Vietnam) countries, with FDI shares in the single digits (ASEAN, 2017). The CLMV countries are key because their low-income status creates an easier path for China to supplant its influence. Apart for Vietnam’s historical adversity towards China, the country holds a giant’s share of FDI inflow into Cambodia and Laos – 22% and 66% respectively – and is currently Myanmar’s largest trade partner at a third of its total (ASEAN, 2017). The key difference between China and Japan is their motivation behind investing heavily in Southeast Asia. While both seek to balance each other out with regards to the SCS dispute, Japan does not have an apparent geopolitical agenda comparable to that of China. At least from an investment perspective, it appears Japanese companies are flocking for its economic incentives, and not for any Japanese-government mandated charm offensive. CLMV states will need to provide better economic incentives to Japan than the ASEAN-6 (Malaysia, Thailand, Singapore, Brunei, Indonesia, the Philippines). At the moment, this is unrealistic because even with their high growth rates –averaging at 6.1% compared to 4.1% in ASEAN-6 in 2016, GDP per capita in CLMV remains 2.7 times lower than the ASEAN-6. Should ASEAN Member States fail to find a suitable substitute for China’s inflowing capital, an alternative proposal could instead be to create a regional-level capital distributing mechanism. The idea is to have all capital inflows to ASEAN to first go through a central collecting agency, which will then distribute them to areas of the highest need. An advantage of this strategy is in eliminating the ‘carrots and sticks’ strategy China currently employs in the region. China can then no longer reward obedience and punish confrontations. The strategy also encourages a more equitable development within the region, which, as stated previously, remains disparate between CLMV and the ASEAN-6. As compelling as this idea may be, it faces several challenges. First, it will face an uphill battle from ASEAN Member States because a centralized collection agency essentially implies a violation of the non-interference policy. Given ASEAN’s diverse economies with varying returns to investments, a central collecting agency may deter potential investors since they will not be able to control where their investments go. The final caveat is that the political feasibility of this strategy, given China’s charm offensive, nears impossibility. China will likely use its leverage in Cambodia and Laos to veto any binding decisions on the strategy. Taking such roadblocks into consideration, perhaps a modification of this idea can work. Instead of a centralized collection agency that becomes the middleman for foreign investments, ASEAN Member States can opt to create their own version of the ASEAN Infrastructure Fund (AIF), an initiative under the Asian Development Bank (ADB) that gives financial assistance for infrastructure building. AIF on its own is insufficient because it remains capped at $300 million a year, far below the what is needed by the region. Indonesia, for example, needs $358 billion worth of investments in infrastructure spending by 2019 to keep pace with its targets (ASEAN, 2017). More tellingly, AIF funds are tied to projects endorsed by the ADB, in which China holds the largest voting share amongst Asia-Pacific shareholders. The proposed ASEAN Regional Fund (ARF) ought to be within the full jurisdiction of ASEAN, where it can dispense funds without having to answer to China or other superpowers. It will become obvious that ASEAN governments will not be able to gather the funds necessary on their own. One possible model to follow is to engage in a public-private partnership (PPP), only instead of a single company doing a joint venture with a particular ASEAN Member State, the proposed ARF will be responsible to pool money by their relevant sectors. Any infrastructure building projects will then be on a shared value basis. That way, state-owned companies cannot exert any geopolitical agenda behind proposed projects. In 2016, intra-ASEAN investments accounted for a quarter of FDI flows in the region ($24 billion), a 500% increase from 2003 levels where an upward trend has been observed since. What is more compelling is how intra-ASEAN investments in CLMV are also getting the lion’s share of total investments (ASEAN, 2017). These figures show an increasing regionality of ASEAN businesses, and that an ASEAN-led ARF may not be far from reality. In terms of feasibility, it is to be expected that ARF’s implementation will take a long time since there remains the issue that ASEAN Member States possess varying regulatory frameworks. It would require some minimal level of harmonization to avoid issues such as double taxations. As far as short-term strategies go, ASEAN Member States are fairly limited by the constraints echoed throughout this paper. A viable short-term strategy has to navigate through the inability to legally coerce other ASEAN Member States, an international law framework that does not have a real enforcement power, and high reliance on economic incentives. Therefore, it can be argued that a state-level solution remains the most viable option. The explicit suggestion here is for Member States to individually forgo trade deals with China, and signing less lucrative deals with other external partners or other ASEAN Member States. What the strategy aims to do is to capitalize on ASEAN Member States’ incentive-driven nature to promote multilateralism. How is this politically viable on a local level? Intuitively speaking, foregoing valuable financial assistance may paint incompetence to local voters, thus potentially costing elections. ASEAN Member States, however, are ‘strong states’, where “policymakers are highly insulated from [domestic interest-group pressures]” (Oatley, 2016). It suggests that ASEAN governments have significant room to follow policies that the public may not agree with, which includes the proposed strategy above. The core logic of the strategy is the following: increasing intra-ASEAN trade and capital flow to facilitate capacity building in ASEAN. These intra-ASEAN investments will help to create formal and informal linkages that intertwine Member States’ interests beyond their own geographical border. These newfound linkages may pressure Member States to also think about their regional investments on top of China’s investments, especially as China becomes more fearless in exercising its ‘carrots and sticks’. In the long run, this could mean a greater need to align policies, hence promoting more multilateral dialogues. In context of the SCS dispute, this could also encourage the option of joint explorations in the waters, solving the dispute at least between ASEAN Member States. The three strategies outlined above focus heavily on trying to balance against China’s creeping charm offensive, but it requires a closer look to determine whether they would automatically solve the SCS dispute. On the one hand, each of these strategies seeks to cripple China’s ability to use money to pressure its ASEAN dependents to respect its interests. On the other, a decaying Chinese influence is not an easy solve; it merely equates to a leveling of the playing field. Another dimension remains unsolvable: the failure of current legal frameworks to fairly arbitrate the dispute. Unless China submits itself to the binding mechanisms under UNCLOS, or voluntarily respects the original PCA ruling, the SCS will remain a contentious issue. A further argument could be made on the possibility that the SCS is not a fight worth fighting. This is in consideration of an earlier cost-benefit analysis of maintaining EEZs in the SCS. The natural resources, namely oil and fish, are unsustainable and are expected to deplete in the near future. Beyond the pretense of sovereignty, it seems clear cut for ASEAN Member States to abandon an unwinnable battle to focus on more actionable strategies. VII. Conclusion A study of the South China Sea maritime dispute requires focus on two key players: China and ASEAN. A surface level observation sees China engaging in questionable behavior in the SCS through its aggressive militarization, island building, and blocking of fishing activities. As for ASEAN, it is striking why there is not a strong multilateral opposition against China, given the high-stakes nature of the disputed areas. A preliminary analysis of how China and ASEAN have approached this dispute so far reveals an insufficient Code of Conduct, where recent negotiations indicated China’s unwillingness to succumb to rule of law at its own expense. There is also the observation that an increasingly diverging ASEAN Member States position also weakens multilateral approaches to solve the dispute. On reasons why the boundary delimitation process has been slow, the argument is two-fold. First, the preference for bilateral process stems from a historical success of such dialogues in the past. Digging deeper, ASEAN’s own structure appears to be at fault. By having a consensus model, and a non-interference policy towards Member States, ASEAN lacks a punishment or coercion mechanism. It means that any regional-level initiatives will require the political goodwill of all Member States. A second dimension that explains the SCS dispute’s prolongation is in the role of international law. UNCLOS, designed to mitigate disputes such as in the SCS, is found to be inherently flawed in two ways. First, UNCLOS’s legal definitions for what states can claim complicates the SCS dispute; the unnecessary inclusion of EEZs contributed towards increasing competition to take control of features in the SCS. Secondly, the use of opt-out clauses from certain parts of the arbitration process defeats the whole purpose of the arbitration process altogether. Another catalyst for Chinese domination in the region is in a receding US trend, at least in terms of its soft power. China recognizes the weakness of its hard power; hence, it exercises its soft power through a charm offensive strategy. This entails changing China’s rhetoric among ASEAN Member States as well as handing out generous economic incentives. The observation that China channels capital to Member States that protect its interests, and pulls out of those who do not, showcases the country’s ‘carrots and sticks’ gameplay to become the region’s new common denominator. Between the fight for sovereignty and economic incentives, it was shown that fighting for sovereignty in the SCS may not be the best strategy after all. Depleting fisheries and oil reserves does not amount to the same long term economic benefits of a Chinese infrastructure splurge. Also, the increase in non-tariff measures and barriers (NTM/NTB) upon the launch of the AEC in 2015 shows that ASEAN Member States are inherently incentive driven. Therefore, a Chinese-led regionalism is clearly the profit-maximizing outcome. In exploring the downsides of a Chinese-led regionalism, comparing the operation of ASEAN to a cartel, leads to the equilibria where Member States are strongly incentivized to deviate from a cartel-like arrangement. The difference from an ASEAN-led regionalism is in the norms China practices. China’s rejection of the PCA, for example, shows brazen disrespect for international law. Norms practiced by China does not promote healthy intergovernmental relationships moving forward. There is now a recognition that the SCS maritime dispute is only a small part of a larger, more existential threat towards ASEAN. Strategies moving forward should not then be short-sighted to any single aspect such as the SCS dispute alone. The first recommendation would be to diversify the sources of foreign investments in the region. Japan was given a suitable alternative, but a balancing against China can only happen here if Japan invests in the same sectors and locations, which is unfortunately not the case in such a segmented region. The second strategy is to create a capital distribution mechanism to promote equitable development hence reducing the ability of external powers such as China to influence the foreign policies of any Member State. A central collecting agency may prove to be too intrusive, hence a modified version centered on pooling money through public-private partnerships (PPP) may be a good way to do this. The only downside of this strategy is that it requires significant advances in ASEAN’s regional regulatory framework. One potential short-term solution to the existential threat posed by China would be to capitalize on ASEAN Member States’ ability to pursue sometimes unpopular policies in their respective countries to encourage intra-ASEAN investments. The whole point of this strategy is to further intertwine Member States’ interests within the region, but beyond their own national borders. These will create formal and informal linkages which will pressure governments to protect their now far-reaching investments. This is a form of an economic incentive-led way of encouraging multilateralism. All in all, as the strategies proposed show, ASEAN remains an essential medium in managing internal and external threats to Southeast Asian nations. ASEAN’s flaws are being used against it, but it also exposes where it can improve on moving forward. That is good progress. Endnotes 9To meet its energy demands, China imports 54 percent of its oil from the Middle East, 80 percent of which passes through the southern SCS passage. 10 Southeast Asia technically consists of 11 countries, with Timor-Leste remaining as an observer of the bloc 11 Cambodia, widely considered as China’s “most faithful client state”, has been behind the blockade of at least two post-summit statements; their position could be because China remains Cambodia’s largest aid provider, an incentive the low-income state sorely needs to catch-up with other ASEAN Member States. 12 Malaysia’s military exercise is part of a growing bilateral military cooperation between the two countries. It has grown from cooperation in disaster relief towards sea lane protections in Straits of Malacca. China also signed a ~$13.5 billion contract to build a rail link that will cut cargo shipping by 30 hours. 13 Vietnam began dredging its military-controlled Ladd Reef in 2016, and signed a gas-drilling venture with ExxonMobil due to be in full operation by 2023. 14 Singapore is in an ongoing dispute with Malaysia over Pedra Branca and South Ledge; Thailand and Cambodia both dispute overlapping claims over Koh Kut; Myanmar does not have shore in the SCS; and Laos is a landlocked country. 15 “In the mid-1990s, China had tried to use military strength to intimidate other countries in Asia, by aggressive moves like sending ships to unoccupied, disputed reefs in the South China Sea. At the same time, Beijing called on other nations in the region to abandon their alliances, mostly with the United States, arguing that these had been made obsolete by the Cold War. This strategy backfired. Countries across the region condemned Beijing’s aggressive behavior and solidified their military links with the United States, drawing the US armed forces closer into the region, and closer to China—exactly what Beijing did not want.” 16 The FDI is on a net basis, and computed as follows: Net FDI = Equity + Net Inter-company Loans + Reinvested Earnings. The net basis concept implies that the followings should be deducted from the FDI gross flows: (1) reverse investment (made by a foreign affiliate in a host country to its parent company/direct investor; (2) loans given by a foreign affiliate to its parent company; and (3) repayments of intra-company loan (paid by a foreign affiliate to its parent company). As such, FDI net inflows can be negative. 17 Japan’s FDI share in 2016 are as follows: Vietnam, 10%; Myanmar, insignificant (collapse into Others; Lao PDR, 4%; Cambodia, 9%. 18 In 2016, intra-ASEAN investments account for: Cambodia, 28%; Laos, 18%; Myanmar, 58%; Vietnam, 18%. 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Financial Literacy, Credit Access and Financial Stress of Micro-Firms Evidence from Chile Lucas Rosso Fones University of Chile Author Christopher (Casey) Lingelbach Emily Belt Orly Mansbach Editors Fall 2019 Download full text PDF (23 pages) Abstract In Chile, as well as in the majority of the economies in the world, there exists a wide range of programs targeted towards the support of micro-entrepreneurs, providing either funding for their projects or business training. Using the 2006 and 2009 Chilean Social Protection Survey (EPS) dataset, data from the Superintendence of Banks and Financial Institutions (SBIF), and using an instrumental variables (IV) approach, this article presents evidence against financial literacy training programs as it finds no significant relationship between financial literacy on credit access or financial stress of micro-firms. Moreover, using a subsample of the data, this article shows that the results must be interpreted as an “upper bound,” thus strengthening these conclusions. I. Introduction In Chile, as in most of the world, micro-firms—firms with 10 or fewer employees—play a substantial role in the performance of the economy by their contribution to production and employment. Therefore, over the last few years, authorities have developed several policies targeted to encourage entrepreneurial activities. These policies include business skills training, asset transfers and credit subsidies. For example, since 2010, a large-scale government program run by the Chilean Ministry of Social Development offers an in-kind transfer of start-up capital plus 60 hours of business training to approximately 2,000 micro-entrepreneurs each year. Due to this governmental interest in micro-firms, there is a wide literature that has studied the effect of micro-firm support on growth, unemployment, poverty, productivity, and other economic variables. Overall, the evidence leans toward a positive and statistically significant effect of credit-access programs on these variables; however, the evidence with respect to business skills is weaker. Conversely, other studies have linked financial literacy with the probability of having access to credit and the level of debt, though these studies are usually at the individual or family level. For instance, Alvarez & Ruiz-Tagle provide evidence that financial literacy is positively related to credit access, but they find no significant evidence for financial stress. Economic models of investment often rely on the assumption that firms decide the amount of capital and labor that maximizes their profit. This assumption is called the rationality of firms. Furthermore, these models evaluate the present value of the expected cash flows in relation to the initial investment. From the work of Modigliani & Miller it follows that, in a world with taxes, levered firms (companies with more debt than equity) have a greater value than non-levered firms, at the expense of a higher bankruptcy probability. However, under the assumption of rationality of firms, these models are unable to take into account the lack of financial skills of those who run the firms, which might affect their decision-making and lead them to choose sub-optimal levels of debt. This issue is especially important in micro-firms due to the often limited human capital of their owners. Thus, it is likely that micro-firms with limited financial skills hold high levels of debt or fail to renegotiate their debts, which can affect the individuals’ utility through larger levels of poverty or unemployment, among other effects. From a policymaker’s standpoint, there are two possibilities to support entrepreneurs: business training or funding support. On the one hand, business training intends to provide skills for better management of the business. For example, such training programs may provide client negotiation skills, marketing skills, working capital management, growth strategies, and more. On the other hand, funding support seeks to fix liquidity constraints which diminish the rise of new business and the prevalence and growth of existing ones. This paper intends to establish a causal relationship between financial literacy and both credit access and financial stress of micro-firms. Evidence in favor of a causal relationship would encourage the design of business training programs as a complement to the existing asset-transfer programs for micro-entrepreneurs. Using data from the 2006 and 2009 Social Protection Survey (EPS) and information from the Superintendence of Banks and Financial Institutions (SBIF) this paper presents evidence against financial literacy programs for micro-firms given that it does not find statistically significant coefficients for either credit access or financial stress. Nevertheless, a sharp reader may have concerns about the internal validity of the results as data restraints do not allow an experimental design for a specific policy. However, this paper tries to provide evidence regarding the effect of greater financial literacy on micro-firm financial decision making, giving broad conclusions on this matter and contributing to future policy design. In addition, as there are very few financial skill programs, it is unlikely that this may drive this paper’s results. Additionally, due to the endogeneity of financial literacy (the correlation of the variable and the error term used in this model), this paper proposes an instrumental variable (IV) approach, using the number of banks at a township level as an instrument for financial literacy. As it will be argued later, this instrument satisfies both the relevance and exogeneity conditions. Likewise, given the limited amount of observations that this sample contains, it is not possible to estimate the coefficients using the fixed effects model, which may drive this paper’s results. For instance, it is reasonable to think that those who appear as micro-firm owners in both years are the ones with more financial literacy, causing biased coefficients due to a non-random attrition, the process by which the strength of the relationship gradually decreases. Hence, by comparing a pooled model with a subsample of individuals only from the EPS 2006, this paper establishes an “upper bound” for the estimated coefficients. Given that this paper finds no significant results, this work supports the evidence found on other business training studies, such as the results presented by Karlan & Valdivia. The rest of the paper is divided into seven sections. Section 2 carries out a brief literature review. Section 3 describes the data, defines the main variables and presents some stylized facts. Section 4 presents the underlying economic model that sustains this investigation. Section 5 presents in detail the empirical model and discusses the main estimation problems. Section 6 shows the main results and robustness checks. Finally, section 7 presents conclusions and public policy recommendations. II. Literature Review There is a rich literature related to studying the effect of micro-entrepreneur support on poverty alleviation, unemployment, and other variables, especially regarding the evaluation of financial aid programs (credit subsidies, asset transfers, and more) and business training programs. For instance, Bruhn & Love exploit the almost simultaneous opening of more than 800 bank branches in Mexico targeted to low-income individuals, using this event as a “natural experiment.” With this experimental design and using a difference-in-difference strategy (comparing areas that received banks to similar ones that did not across time), they present evidence of a positive relationship between credit access and poverty alleviation. In the same way, Beck, Demirgüç-Kunt & Levine, using a dynamic panel at country level, find a negative and statistically significant relationship between credit access and inequality. This relationship is due to the heterogeneity in the improvement of credit access, being low-income individuals the ones who benefit the most from improved credit access. Likewise, Levine, Loayza & Beck use both cross-section and dynamic panel approaches, as well as instrumental variables to find a negative relationship between financial intermediary development and economic growth. These results are in line with Aghion et al. which finds that higher credit restraints affect economies’ mean growth. We now turn our attention to the mixed evidence of business training programs for micro-entrepreneurs, which cover a wide range of useful managing skills such as promotion skills, working capital management, and negotiation strategies. The work performed by Karlan & Valdivia or Almeida & Galasso fail to find significant evidence of business training programs for micro-entrepreneurs in Peru and Argentina. In contrast, Berge et al. and Bjorvatn & Tungodden find positive effects of human capital accumulation programs for micro-firm owners in Tanzania, while Mano & Iddrisu find the same in Ghana. Moreover, considering micro-firm owners in Chile, Martinez, Puentes & Ruiz-Tagle use the MESP program and an experimental design to provide useful evidence regarding a positive relationship between a combination of an asset transfer and business training on employment and wages of low-income micro firm owners, most of whom are women. However, they are unable to study the effect of each component of the program by itself. Examining financial literacy levels, literature focuses mainly on individual or family level. For example, Alvarez & Ruiz-Tagle, using an IV identification strategy, find some evidence related to wider credit access for households with higher financial literacy; however, they find no evidence for the levels of financial stress. Regarding individuals, some evidence shows that lower understanding of financial concepts can trigger larger levels of debt and higher probability of default. Nevertheless, it is also important to consider that lower levels of financial literacy might suggest a lower propensity to sustain relationships with financial institutions. Finally, considering micro-firm support programs, the work performed by Drexler et al. studies the effect of two types of financial skill training programs in the Dominican Republic. The first provides standard classes covering accounting and financial contents while the second offers basic classes teaching rules of thumb of finance and accounting. Among their results, the authors conclude that lower-complexity courses are more effective on financial decision-making of the treated. Despite not finding significant effects on profit or sales of any of the programs, they find some evidence of an increase in bad week sales. Overall, literature tends to lean in favor of a positive relationship between credit access and different variables related to utility of economic agents. However, evidence is mixed regarding business training programs. Further, these programs rarely focus on financial literacy or link this variable to the probability of having access to credit (at least not at a micro-firm level) despite its potential relevance in explaining the firm's liquidity constraints. Therefore, this paper seeks to provide evidence for the relation between financial literacy and the two dependent variables of interest: credit access and financial stress, with the purpose of public-policy recommendations. III. Data and Stylized Facts The data used for this work comes mainly from the Chilean Social Protection Survey (EPS), specifically the surveys of 2006 and 2009. This paper also uses data from the Superintendence of Banks and Financial Institutions (SBIF), which provides information on the distribution of bank branches at a township level, to create the instrument proposed in this paper. In both the EPS 2006 and the EPS 2009, the surveys interview roughly 15,000 households with a total of 81,096 and 74,047 observations, respectively. That being said, this paper only considers individuals that declare being owners or partners of some business. Furthermore, defining micro-firms according to the amount of workforce, this paper drops every business with more than 10 workers. Ultimately, after cleaning the database, 935 observations remained, of which 575 come from the EPS 2006 and 360 from the EPS 2009. One of the greatest strengths of the EPS is that it has a section of questions related to financial knowledge and the risk aversion of the individual. That section allows this paper to develop a Financial Literacy Index (FLI) and a risk aversion index, both in line with the ones presented by Flores, Landerretche & Sanchez. Moreover, consistent with Alvarez & Ruiz-Tagle, this paper defines financial stress as the debt to income ratio. In this matter, financial stress is defined as the total amount of debt related to business reported by the interviewee, divided by his mean annual income. Moreover, a proxy for the formality of the business is created by generating a dummy variable that takes the value of one when the firm declares sales taxes and zero if not. In Table 1 there is a summary of the main variables used for this investigation. Regarding FLI, on average, individuals interviewed answered correctly to 41 percent of the questions. Table 2 shows the distribution of correct answers. Surprisingly, just 1.07 percent of the sample answered correctly to the six questions of basic financial concepts and less than 25 percent of those interviewed responded correctly to more than half of the questions. Moreover, regarding the compound interest rate question, which is arguably the most important question when establishing a relationship with a financial institution because loans are calculated over a compound interest rate, just a 2.78 percent answered correctly. This number is considerably lower than the one found by Lusardi & Mitchell for baby boomers in the US, which was around 18 percent. Looking at credit access and financial stress, only 16 percent of the sample has some debt when interviewed, while the mean debt represents 19 percent of the individual annual income. Nevertheless, this last number is mainly driven by the relationship (or lack of relationship) with the financial institutions. Moreover, conditional on having a loan, financial stress rises to 14.3. However, despite the magnitude of the mean, it is important to consider that this debt considers long run loans such as land or equipment loans. Appendix 3 shows the means for these variables by sex and age, showing that individuals between 24 and 54 years old have greater levels of financial stress as well as the largest share of individuals that participate in the financial markets. Now this paper proceeds to look at the township-level distribution of bank branches. Townships have on average 36 bank branches. However, it is important—especially for a geographically unique country like Chile—to consider the heterogeneity of the data given the concentration of bank branches within the wealthiest, more urbanized and more educated townships, like the ones in the Metropolitan Region. Appendix 4 details the distribution of bank branches by regions. For example, there are 75.8 bank branches in each township from the Metropolitan Region, while in the third region the number goes down to 6.1. IV. Theoretical Framework For a better understanding of the empirical strategy, it is essential to rely on a theoretical model that provides an economic interpretation for the results obtained. As mentioned earlier in this paper, assuming that the firms evaluate business projects using a simple stochastic model of present value, this statement can be formalized with the following equation: (1) Yt=-I0+i=1niEtt Where Yt is the expected present value of the project in t, yt is the cash flow on period t, δ∈ (0,1) corresponds to the discount rate, and Et is the expectation operator, conditional on the set of information t. This expression is a simplification of the one proposed by Campbell & Shiller, which is very useful for the purposes of this investigation. If we assume that not all of the individuals have access to the same set of information t, or they do not understand completely all the information available, it is reasonable to think that some entrepreneurs might forecast their cash flows incorrectly. This will likely affect the expected present value of the project; thus, these estimations can compromise the firm’s liquidity or restrain their access to external funding due to lack of information. Likewise, wrong cash flow estimations might affect the firm’s decision whether to invest or not, as well as their growth possibilities given that projects are subject to the condition Yt > 0. A key assumption of this model is that individuals overestimate their cash flows as the result of a smaller set of information, which will be called t'. This can be taken from the evidence presented by Agarwal, Driscoll & Laibson who show that on the mortgage market, individuals fail to minimize their debt costs, which can be extensible to other types of debt. In that case, individuals underestimate the debt cost as they do not understand how much they pay nor their options associated with their loan. One clear example is that, on the compound interest question (see Appendix 1), 96.3 percent of those interviewed answered incorrectly and 29.3 percent of those interviewed answered as if it was a simple interest rate, which reaffirms the conclusions of Agarwal et al. Therefore, considering the assumptions mentioned above, we have that: (2) Yt-Yt'=i=1niEtt-Ett'<0 In which the right-hand expression would be the present value of the estimation error, which depends on the information gap t-t'. Thus, the bigger the information asymmetries, the less accurate the estimations for projects run by entrepreneurs with limited access to information—or in this case, entrepreneurs with low financial literacy—will be. In addition, this model, sustained by the evidence presented by Agarwal et al. predicts that the transmission channel for illiteracy will be related to costs, not income. Another important factor is the decision of individuals to increase their stock of financial knowledge. It is easy to see that increasing financial skills endowment has costs and benefits. On the one hand, benefits are related to the model shown above as they allow better access to information and hence allow the individuals to make better investment decisions. On the other hand, the process of acquiring basic financial knowledge takes time and resources, which implies costs. Overall, theory predicts that individuals optimally choose the stock of financial knowledge that maximizes their welfare, as formalized by Jappelli & Padulla. However, this model runs out of the main goal of this investigation. Finally, it is important to mention that, according to the theoretical model presented by Modigliani & Miller, in the presence of information asymmetries between firm owners and the market, levered companies are more valuable as they signal a low bankruptcy probability to the market. This would generate, consistent with the work of Ross, an incentive to be levered. This statement generates some concern regarding the prediction that firms with bigger financial stress have owners with lower financial literacy. V. Identification Strategy For the identification strategy, two models are estimated in parallel: one for financial stress and the other for the dummy variable of credit access. As such, this paper estimates the following equation: (3) Yit=Xitβ+δFLIit+t+it In which Yit represents the two dependent variables, financial stress and credit access, for each specification. Xit is a vector of individual control variables (such as education, age, or gender) and firm control variables as a dummy for formality, business age, and amount of workforce. t corresponds to a dummy variable that takes value 1 for year 2009 and 0 for 2006, to control for year-fixed effects. Our parameter of interest, FLI, corresponds to the financial literacy index, which consists of the amount of correct answers from the set of financial questions of the EPS (see Appendix 1 for more detail). it is the error term of the model. Finally, I use robust standard errors to control for possible heteroscedasticity. Regarding the variable of interest of this work, there are reasons to believe that it presents endogeneity issues due to measurement errors of the index or spillovers from those who participate actively in financial markets, as explained by Alvarez & Ruiz-Tagle. The first issue is a result of the noisy nature of financial literacy, while the second occurs because some financial concepts might be learned by participating in financial markets. It is well known that measurement errors on right-side variables will tend to bias the coefficients towards zero, while spillovers are expected to bias the FLI upwards. Therefore, given that both sources of bias operate on opposite directions, the end result will depend on which effect is dominant. In order to tackle the problem of endogeneity, this paper suggests an IV approach, using the amount of bank branches at a township level as an instrument for the FLI. This instrument can be considered exogenous for the financial stress variable as there is no theoretical reason to believe that this might correlate with the level of financial literacy of the interviewee. However, when analyzing access to credit, the relationship is more plausible, because micro-entrepreneurs can choose where to set up their business. That being said, the EPS dataset does not ask for the township in which the business is located, but for the township where the individual lives. Individuals likely did not decide to live in a township due to the supply of financial institutions, but rather due to the accessibility of the township, supply of education establishments, green area supply, compatibility with neighbors, and other variables. Thus, this IV fulfills the exogeneity condition on both specifications. Then, the first stage regressions can be written: (4) FLIict=Xitβ+δBct+t+ict In which Bct would be the number of bank branches on the township c. Another problem related to the estimations is that, when using a pool sample with observations of the EPS 2006 and 2009, it is likely that there will be non-random attrition bias if the reason to disappear from one survey to another is correlated with the FLI. Furthermore, one can think that those interviewed with lower financial literacy will have a higher bankruptcy probability and therefore lower probability to declare being a business owner on the EPS 2009, generating upward biases. The next section tackles this issue and reaffirms the robustness of the results obtained. VI. Main Results and Robustness Checks Table 3 shows the main results of both dependent variables. Columns 1 and 3 show the estimations using Ordinary Least Squares (OLS) with year fixed effects while column 2 and 4 show the results using IV. We notice that for none of the specifications is there a statistically significant coefficient for the FLI; however, in column 2, the coefficient is almost significant at a 10 percent level (p-value of 0.117). Also, we can see that coefficients are considerably larger when using an IV approach, which suggests that the attenuation bias (the underestimation of the absolute value of this data caused by errors in the independent variable) dominates the spillover effect of those who participate on the financial markets. These results are similar to the ones obtained by Alvarez & Ruiz-Tagle, in which they argue that the positive relationship between financial literacy and financial stress might be explained by greater credit access or overconfidence of the more literate individuals. The positive relationship between the FLI and the probability of having access to credit also has the expected sign; however, the significance is weaker than the one presented by Alvarez & Ruiz-Tagle. The lower panel of Table 3 shows the main results of the first stage. Shown in both models, the number of bank branches fulfills the condition of relevance as the F test is greater than 10 and the coefficients are highly significant in both specifications. Regarding the control variables, the reader can see that they all go in the expected directions. However, this paper believes it is important to discuss in detail the formality dummy variable, given that the coefficient is negative and statistically significant for credit access. At first, intuition would suggest a positive relationship between the formality of the business and the probability of getting a loan and its financial stress. Further, one would expect that formally constituted companies should have better access to request a loan on a financial institution. However, it is likely that for micro-firms as the ones studied in this paper, obtaining a loan as a formal company is more of a restraint than an advantage. The reason is very simple: an individual can leave personal assets such as his/her house or car as collateral, which reduces the bank’s risk, so unincorporated companies would take more loans than formal companies. Overall, these results suggest that business training programs related to financial skills would not be effective to diminish the financial stress (and with that the survival probability) nor the probability of having access to credit of micro-firms, as better financial literacy has no significant effect on either of these variables. Thus, a more effective policy design would be related to providing asset transfers and loan subsidies, consistent with the empirical evidence shown in the literature review. A. Robustness Checks Given that the pooled model presented in the previous subsection has observations for micro-entrepreneurs from years 2006 and 2009, it is likely that these results may be biased due to non-random attrition, in which the results gradually decrease in strength. Intuitively, it is reasonable to think that those who report themselves as micro-firm owners on both the 2006 and 2009 surveys are the ones with higher financial literacy levels (as financial literacy would be a useful tool for making optimal financial decisions and diminish the probability of bankruptcy), which would generate upward bias on the estimations presented in Table 3. In that case, results shown before should be interpreted as an “upper bound,” proving solid evidence against a causal relationship between financial literacy and the two dependent variables studied for this investigation. In order to test this hypothesis, this paper estimates again columns 2 and 4 of Table 3, but only for a subsample of year 2006 observations. If the hypothesis is true, both the significance and the coefficients must fall on this new specification. Table 4 shows the results obtained from this subsample, using the IV approach as on columns 2 and 4 of Table 3. From the table above, one can see that the results obtained are consistent with this paper’s hypothesis, as the coefficients (and their p-values) fall on both specifications when using the subsample of observations from 2006. For financial stress, the estimated coefficient falls from 3.899 to 1.698 (and the p-value increase from 0.12 to 0.36), while credit access falls from 2.693 to 2.117 (p-value changes from 0.21 to 0.30). One possible concern regarding these results is that they can be driven by the narrowing of the sample, as for the pooled model the sample was already limited on observations. However, one can see that the standard error falls when the regressions are estimated for the subsample of the year 2006, despite reducing the size of the sample. Furthermore, the instrument bank branches on township is still highly significant (at a 99 percent level for both specifications) and has an F test of 11.54. This implies that the results shown on Table 3 should be interpreted as an “upper bound,” due to the attrition bias, presenting robust evidence against financial training programs, as there is no significant relationship between financial literacy and access to credit or financial stress of micro-firms. VII. Final Conclusions This paper intended to establish a causal relationship between the financial literacy level of micro-entrepreneurs, their probability of having access to financial markets, and their financial stress. Based on the literature regarding this subject and given the large empirical evidence in favor of financial aid programs for micro-firms, as well as the mixed results in business training programs, this paper intended to contribute new evidence relative to the effectiveness of policies that involve business training for micro-firm owners. By using an instrumental variables approach, this paper tried to tackle the endogeneity problems that the financial literacy index (created following Flores, Landerretche & Sanchez) is exposed to. This paper uses the number of bank branches at a township level as an instrument for the index, which fulfills both the exogeneity and relevance conditions. Overall, my results suggest that there is no causal relationship between financial literacy and the two dependent variables studied. Further, due to non-random attrition bias, these results must be interpreted as an “upper bound” which provides solid evidence against financial training programs. 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Drexler, A., Fischer, G., & Schoar, A. “Keeping it simple: Financial literacy and rules of thumb.” American Economic Journal: Applied Economics, vol. 6, no. 2, pp. 1-31. Flores, B., Landerretche, O., & Sánchez, G. Propensión al emprendimiento: ¿Los emprendedores nacen, se educan o se hacen?. 2011. Gale, W., & Levine, R. Financial Literacy: What Works? How Could It Be More Effective?
 The Brookings Institution, 2010. Gerardi, K., Goette, L., and Meier, S. "Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data." SSRN Electronic Journal, 2010. Hansen, B., Econometrics, 2016. Jappelli, T. and Padula, M. ‘Investment in financial literacy and saving decisions’, Centre for Studies in Economics and Finance, University of Naples Frederico II, CSEF Working Paper no. 272, 2011. Karlan, D., & Valdivia, M. “Teaching entrepreneurship: Impact of business training on microfinance clients and institutions.” Review of Economics and Statistics, vol. 93, no. 2, 2011, pp. 510-527. Landerretche, O. y C. Martínez “Voluntary Savings, Financial Behavior, and Pension Finance Literacy: Evidence from Chile,” Journal of Pension Economics and Finance, vol. 12, no. 03, 2013, pp. 251-297. Levine, R., Loayza, N., & Beck, T. “Financial intermediation and growth: Causality and causes.” Journal of Monetary Economics, vol. 46, no. 1, 2000, pp. 31-77. Lusardi, A., & Tufano, P. “Debt literacy, financial experiences, and overindebtedness.” Journal of Pension Economics Finance, vol. 14, no. 4, 2015, pp. 332-368. Mano, Y., Iddrisu, A., Yoshino, Y., & Sonobe, T. “How can micro and small enterprises in sub-Saharan Africa become more productive? The impacts of experimental basic managerial training.” World Development, vol. 40, no. 3, 2012, pp. 458-468. Martínez, A., Puentes, E., & Ruiz-Tagle, J. “The effects of micro-entrepreneurship programs on labor market performance: experimental evidence from Chile.” American Economic Journal: Applied Economics, vol. 10, no. 2, 2018, pp. 101-24. Modigliani, F., & Miller, M. H. “Corporate income taxes and the cost of capital: a correction.” The American Economic Review, vol. 53, no.3, 1963, pp. 433-443. Ross, S. A. “The determination of financial structure: the incentive-signalling approach.” The Bell Journal of Economics, 1977, pp. 23-40. Saavedra, M. L., & Hernández, Y. “Caracterización e importancia de las MIPYMES en Latinoamérica: Un estudio comparativo.” Actualidad Contable Faces, vol. 11, no.17, 2008. Staiger, D. O., & Stock, J. H. Instrumental variables regression with weak instruments, 1994. Appendices Appendix 1: Creation of Variables (a.) Financial Literacy Index (FLI): Consistent with Flores et al., we designed an index following the next set of questions and the number of correct answers: • Question 1: Probability. If there is a 10 percent chance of getting a disease, How many people will catch the disease out of 1000? 
 • Question 2: Lottery Division. If five people hold the same winning ticket from a lottery of $2 million, how much will each receive? 
 • Question 3: Interest rate. Assume that you have $100 in a savings account and the annual interest rate that you receive for this savings is 2 percent. If you keep the money for 5 years on this account, how much money will you have in five years from now?
 a. More than $102 b. Exactly $102 c. Less than $102 
 • Question 4: Compound rate. Let’s say you have $200 in a savings account, which accumulate 10 percent in return each year. How much would you have after two years? 
 • Question 5: Inflation. Suppose you possess $100 in a savings account which gives you a return rate of 1 percent yearly. If the inflation is 2 percent, after one year you could buy:
 a. More than $100 b. Exactly $100 c. Less than $100 
 • Question 6: Risk diversification. Please answer if the next statement is true or false: buying a stock form a company is less risky than buying the same money on several stocks from different companies 
 (b.) Likewise, I use the following risk aversion index proposed by Flores et al. (2011). Risk aversion: 
 • Is 0 if the interviewee prefers a fixed and stable income for the rest of his life 
 • Is 1 if he/she prefers a job in which he/she can, with the same probability, have twice his income 
or 3/4 of his income for the rest of his life. 
 • Is 2 if the interviewed prefers a job in which he/she can, with the same probability, have twice his income or 1/2 of his income for the rest of his life 
 • Is 3 if the interviewed prefers a job in which he/she can, with the same probability, have twice his income or 1/4 of his income for the rest of his life 
 (c.) Type of debts considered for the Financial Stress variable: 
 • Machinery
 • Land and/or agricultural facilities • Animals (cattle)
 • Bank credit line
 • Other 
 Appendix 2: Financial Literacy Index Appendix 3: Descriptive Statistic for FLI and Dependent Variables Appendix 4: Bank Branches Distribution in Chile Appendix 5: Regressions for Financial Stress and Credit Access Detail Appendix 6: Regressions for Subsample Year 2006 Appendix 7: Instrumental Variables

Can You Rationally Disagree with a Prediction Market? Nick Whitaker Brown University April 2021 This paper brings together two literatures: That of the efficient market hypothesis in economics and the relatively recent literature on disagreement in epistemology. In economics, there has been a substantial discussion of how markets aggregate knowledge through prices. In the philosophy of disagreement literature, there is significant agreement that you should defer to those with more knowledge and better judgments than you. I argue that, given these two conclusions, we are epistemically bound to defer to prediction markets in most situations, though I discuss possible exceptions. On the website PredictIt, one can find betting markets for a number of future political events like “Who will be the 2020 Democratic nominee?”, “Will Maduro be in office at the end of 2019?”, and “Will Trump be impeached in his first term?” Shares can be bought at and sold at floating prices between $.01 and $.99, and pay out a dollar if the bet wins. Share prices can be converted into probabilities, i.e. a $0.25 share represents a P(.25). I pose the question of how a rational person must change their credence when they encounter a prediction market like those on PredictIt. I will argue that under almost all normal circumstances, it is not rational to disagree with a well-functioning market. In fact, one should adopt the credence suggested by the prediction market. As I argue, a well-functioning prediction market is, on a given issue, almost always one’s epistemic superior with regard to that issue because it tends to incorporate all available information and aggregate that information effectively in its suggested credence. Given that you are likely not incorporating all available information nor aggregating that information into your credence, you are in a worse epistemic position about a given issue than its prediction market is. Thus, upon encountering a prediction market, you are rationally bound to adopt the credence suggested by it. I see this conclusion as emerging naturally from the efficient market hypothesis (EMH) literature in financial economics and the burgeoning disagreement literature in epistemology, but I think the combined implications have been underappreciated. For example, together they imply that things which normally guide our credence on a given issue – like pundits’ predictions or our interpretations of poll data – ought to hold little influence, if any, over our credence relative to the credence suggested by a prediction market. In many cases, the suggested credence of a prediction market will be surprising. Often, one is inclined to reject it. After looking at enough prediction markets, on will almost certainly find a suggested credence that he or she is convinced is wildly wrong. Nevertheless, I will argue that we should adopt the credence implied by markets, despite how reluctant we may feel. Finally, as I will argue, if one refuses to adopt the credence implied by a betting market and they are not averse to betting, the most rational course of action would be to bet on that market. The Market as an Epistemic Tool: A Short History Markets are efficient. This is suggested by basic economic theory: Given competitive markets and free entry, if people knew the price of an asset would rise or fall, they would buy or sell the asset until the market price of the asset reflected that information. This obviously cannot be exactly the case in reality; no markets are perfectly competitive, and entry is never completely free. Yet just how efficient markets are has been surprising to many, as this fact has been established by over half a century of economic theory and empirical evidence. There are important outstanding questions about how strong a claim “efficiency” should imply, and whether there are times when markets are not efficient, referred to as market anomalies. But, let us begin by reviewing the history of the theory. Efficient Markets Hypothesis was popularized by University of Chicago economist Eugene Fama. The idea began as an outgrowth of his dissertation, published in The Journal of Business in 1965 as “The Behavior of Stock Prices.” The paper argues that stock prices are essentially a “random walk” in that the “patterns” perceived in the past performance of a stock in no way indicate the stock’s future performance. Thus, for asset price movement to be a random walk, the future price needs to be independent of past prices. As Fama writes: In statistical terms independence means that the probability distribution for the price change during time period t is independent of the sequence of price changes during previous time periods. That is, knowledge of the sequence of price changes leading up to time period t is of no help in assessing the probability distribution for the price change during time period t. (35) Given that future prices are independent from past ones, no amount of study of the past performance of a stock will allow one to predict future performance. To the extent that the future is known, we should expect that information to be already incorporated into the asset price. Thus, the question becomes: Why are future prices independent of past prices? It is this question that led Fama to his work on EMH. Roughly speaking, if markets are efficient, only what is truly unknown is not incorporated into an asset’s price, and thus future movements in that price are random. As investors with information about the future buy and sell a given asset, the price of that asset would come to reflect all available information about the future. In 1970, Fama published his most cited paper, “Efficient Capital Markets: A Review of Theory and Empirical Work” in The Journal of Finance. In the paper, Fama clearly defined the terms on which a market can be considered efficient: “A market in which prices always ‘fully reflect’ available information is called ‘efficient.’” As this cannot be exactly true, Fama proposes it rather as a null hypothesis in the paper. To test efficiency more precisely, Fama delineates three versions of the hypothesis: The weak form, the semi-strong form, and the strong form. The weak form states that markets are efficient if future performance cannot be predicted from past prices. The semi-strong form states that markets are efficient if future performance cannot be predicted based on any publicly available information. The strong form states that the future performance cannot be predicted even with insider information. As the title of the paper suggests, Fama discusses the theoretical and empirical foundations for our beliefs. The theoretical work is interesting, but perhaps not worth exploring here. Essentially, there are different mathematical models which are able to test different versions (weak, semi-strong, strong) of the hypothesis. As Fama explains, early studies mostly focused on the weak version, essentially testing for the independence of new prices from historic prices. As the weak version gradually became established, research turned to the semi-strong version, which can be thought of as the question of how quickly newly public information is incorporated into market prices. Fama finds that tests of the semi-strong EMH lend “considerable support” to the hypothesis (408). The strong hypothesis had not been extensively studied at the time, but limited evidence did show that insiders were able to generate super-normal returns, and thus asset markets are likely not strong-form efficient. As Fama concludes, “For the purposes of most investors the efficient markets model seems a good first (and second) approximation to reality” (416). Since its publication, Fama’s account of EMH has faced decades of empirical scrutiny and has become a major topic of debate in finance. This is especially true as EMH challenges the value proposition of active money managers, who charge their clients fees to supposedly “beat the market.” According to EMH, their ability to do this is essentially as good as anyone else’s. Thus, many have sought to demonstrate market inefficiencies of which savvy investors could take advantage. There is a certain irony to this process, as whenever an inefficiency becomes known it becomes accounted for in the market prices and thus the prices cease to be inefficient. Conversely, in the event that everyone believed markets were efficient and invested passively, markets would become inefficient. A major meta-analysis of EMH literature was conducted in 2002 by Burton G. Malkiel, one of Fama’s coauthors. As Malkiel writes, if market anomalies were abound, we would expect that actively managed funds would be able to capitalize on these anomalies and consistently make supernormal returns. Thus, we can test market efficiency by looking at whether actively managed funds have been able to outperform diversified index funds. When fees charged by actively managed funds are considered, investment firms have actually underperformed relative to the market (Malkiel 2002). This suggest that even to the extent markets are inefficient, we are bad at consistently identifying these inefficiencies. Beyond Finance: Prediction Markets The key insight of EMH is an epistemic one: Markets tend to reflect all publicly available information. Though the theory has been traditionally framed as a theory of asset pricing, research was quickly done as to what information about the future could be gleaned from asset prices. In 1975, Fama published a paper on “Short-Term Interest Rates as Predictors of Inflation” to do just that. Since then, the idea has been taken further, to structure assets for the explicit purpose of efficiently aggregating information about the likelihood of future events. Economist Robin Hanson has been a major proponent of this, proposing that we develop “prediction markets,” sometimes referred to as “idea futures” or “information markets”. Typically, a prediction market is structured as a binary option that pays out either 0% or 100%. Thus, the price of bets can be converted into credence. If the prediction market is quickly incorporating all publicly available information, as EMH would suggest, then we can expect the credences suggested by the prediction market to be maximally informed. Relative Epistemic Positioning Given the epistemic power of prediction markets, we may ask how we should respond when we disagree with the credence suggested by the prediction market. Perhaps the initial question in any disagreement scenario should be: “Are you in a better position to judge B than your interlocutor is?” This question can be answered by considering a number of factors. Bryan Frances, in his book Disagreement, enumerates a number of considerations for epistemic positioning. Some of his main criteria are: • Cognitive ability had while answering the question • Evidence brought to bear in answering the question • Relevant background knowledge • Relevant biases After these factors, we can follow the disagreement literature in categorizing our interlocutor as being an epistemic peer, superior, or inferior on the given issue B. With this in mind, we can ask a central question: Given the efficiency of prediction markets, what is their epistemic positioning relative to us? If prediction markets are approximately semi-strong efficient, then, by definition, they are incorporating all public information into their implied credence. In most circumstances, one’s credence is formed with less information than all publicly available information. Depending on the topic, the difference in information between you and a given prediction market may be small or vast, but regardless, the prediction market is likely your epistemic superior in this regard. Additionally, a prediction market is almost certainly has better judgment than you do. We can think of good judgment as aggregating information in an accurate way. Implicit in any bet is the bettor’s weighting of his or her evidence. Just as a bettor would have an opportunity to profit on unique evidence they possessed, so to could they profit from weighting the evidence in a more accurate way than others. For example, we can imagine a prediction market on a mayoral race for a town. Let us assume that all of the relevant information about the race was comprised of three polls, and everyone betting in the market was aware of this information. Though there is no disparity between the bettors this information, a bettor could gain an edge by having the best sense of which of the polls were more accurate than others. By making these bets, he would push the betting market towards aggregating the poll results in the most accurate way. A better would be incentivized to do this, as they could profit off of a correct opinion until it was fully represented in the market price. Indeed, we could think of good judgement (or accurately aggregating information) as another type of information, higher-order information. So, we should expect a prediction market to not only to be incorporating more information, but also to be incorporating more higher order information leading to prediction markets aggregating that information more accurately. Thus, we can classify prediction markets as epistemic superiors on their relevant proposition under normal circumstances. Disagreeing with Epistemic Superiors In his paper “Reflection and Disagreement,” Adam Elga discusses how we should be guided by our epistemic superiors. He gives the example of the weather person, to whom we defer completely. If the weather person says there is a 60% chance of rain today, my credence that there will be rain today becomes 60%. Elga calls this treating the weather person as an “expert.” When someone is an expert with regard to weather, “Conditional on her having probability x in any weather-proposition, my probability in that proposition is also x” (2). As Elga writes, this means deferring to the expert on two accounts: Information and judgement. By deferring to the weather person with respect to information, we admit that she has more information (regarding weather) than we have. By deferring to the weather person with respect to judgement, we admit that she has a better manner of forming opinions (regarding weather) than us. Presumably, some people or things should be treated as experts and some people or things should not be. If a person or thing does deserve to be treated as an expert on a given domain, we should defer to their credence. If a person or thing does not deserve expert treatment, perhaps they or it should play some other role in our credence formulation. As Elga points out, there are two obvious ways the forecaster could cease to be an expert, either by failing to have more information or in failing to have better judgement. If I knew that the weather person’s radar was broken, and thus her information was corrupted, she would cease to be an expert. Similarly, if she were very drunk such that her weather judgment was inhibited, she would also cease to be an expert. Given the previous discussion of EMH and prediction markets, I will assume that they are, in general, incorporating more information and better judgment into their suggested credence than a given individual is. Thus, a prediction market is an expert with regard to its topic, and one should normally defer to it. However, just as there are situations in which a weather person fails to be an expert with regard to weather, we might expect that there are situations in which prediction markets cease to be experts. Let’s discuss a few potential situations. Information Errors For any market to function, it must be sufficiently thick, as opposed to being a thin market, one with few buyers and sellers. If I set up a prediction market on a subject and only allow three of my friends to bet on it, the market would have only as much information as the three of my friends have, and thus could not be considered an expert. For my purposes, I will limit the following discussion to thick, functioning prediction markets, though thin markets would constitute exceptions to my arguments here. One initial first information error is that you might be privy to important insider information that has not been incorporated into prediction market prices. If that were the case, the prediction market would cease being an expert to you on account of it lacking knowledge you have. However, whether there is insider information that has not been incorporated into the price is a question of whether prediction markets are efficient in the semi-strong sense or strong sense. As has been discussed, stock markets have not been found to be efficient in the strong sense. However, in the stock market, buying and selling stocks based on insider information is illegal under insider trading laws. In many prediction markets, which are not regulated by the US Securities and Exchange Commission, this is not the case. So, one might expect more insider information is incorporated. Indeed, there is a substantial question of whether the insider information you possess is not already part of the price. If it is, your disagreement with the suggested credence of the prediction market may not be justified. So, there is a substantial question of whether your “insider information” has not already been incorporated into the suggested credence of the prediction market. However, let’s assume that the information is actually something only you possess. How then, should the prediction market be treated? In this case, Elga argues that we can treat the prediction market as a “guru.” In guru cases, rather than accepting a credence unconditionally as we do with an expert, we can accept their credence conditionally. We can formalize this following Elga. Let H represent a given proposition and P’ represent the prediction market’s probability function. In the expert prediction market case: P (H| Prediction Market has P’) = P’ (H) In the guru prediction market case where “X” is your insider information: P(H|Prediction Market has P’) = P’ (H| X) Thus, Elga advises we conditionalize the guru’s probability on our unique information. So we truly have unique information, we can conditionalize the prediction market’s implied credence on it to form our optimal credence. How exactly this conditionalization should work could be simple or complex. If you were the doctor of a presidential candidate and, after an appointment with the candidate, you came to the conclusion that the candidate had a terminal illness and would die before the election, P’(H | X) would be near zero, as we would obviously expect the prediction market to suggest something similar if the information was known. However, if you were a friend of a presidential candidate, and the candidate told you: “I have just decided that tomorrow I will be announcing new policy X. I have not told anyone besides you.” How could you conditionalize a prediction market’s suggested credence on this information? It is hard to say. Perhaps you could see if any other candidate had announced a similar policy, or look at how the policy was polling, to try to get a sense of whether your candidate friend more or less likely to be elected after he or she announces the policy. Yet, this will always require some degree of guesswork and judgement. At the same time, this problem is common to conditionalizing on other types of evidence. Let us assume that your P(raintomorrow)=.5, and your friend said, “What would your credence be if I told you my Dad guaranteed it would rain tomorrow?” You might have some sense of this depending on what you knew about your friend’s father, but some degree of fuzziness here seems inevitable. Another possibility the market might have anomalies or biases which would allow for a rational disagreement with its suggested credence. The most commonly discussed bias in prediction markets is called “Favorite-Long-Shot Bias.” The bias is an empirical phenomenon; bettors have been known to over-value “long-shot” bets relative to favored ones. For example, the 1/50 horse at the horse race might actually perform closer to 1/100. Both rational expectations and behavioral explanations have been proposed to explain this phenomenon as it violates EMH. The nature of the explanations themselves is not relevant to the current discussion, but the existence of favorite-longshot bias does suggest that if a prediction market is suspected to be manifesting the bias, one should treat the market as a guru and conditionalize the market’s implied credence on the bias: P (Long-Shot | Prediction Market has P’) = P’ (Long-Shot | Long-Shot Bias) We may not be able to conditionalize perfectly, but we could look to the typical effect size of long-shot bias in similar prediction markets, and try to work towards the conditional probability from there. Thus, the bias can at least be mitigated. A final information error might be that a prediction market is being fed bad information by a manipulating bettor, who, knowing that people were using the prediction market inform their view about the future, seeks to manipulate the prediction market. Hanson discusses this potential problem in 2007 paper, “A Manipulator Can Aid Prediction Market Accuracy.” As the title implies, Hanson comes to the surprising conclusion that manipulators not only do not impede the functioning of a prediction market, they make it more accurate. As Hanson suggests, we can think of a potential manipulator as adding “noise” into the market. Because of this noise, the expected return on accurate information increases, thereby attracting more investors. With more investors, more information comes into the market, making it more accurate. However, if you did suspected that other investors were not capitalizing on the manipulator and correcting the market, you could also conditionalize on the suggested credence of the market towards what the suggested credence would look like without a manipulator. Though there are potential information related risks, they seem to be sufficiently uncommon that one should not expect them in normal circumstances. Insider information is possible, though may not actually be truly non-public. Prediction market biases may exist, but can be accounted for. Market manipulation seems counterproductive. Information related errors should be looked for, but they are not able to diminish the established informative power of prediction markets. Judgment Errors The second type of errors, judgment errors, relate to the ways in which information is aggregated. Markets are one way of aggregating information, but there are others, like deliberation. What if you came to your credence as part of a deliberating group, incorporating the knowledge of many into your credence? Let us even assume, for the sake of argument, that your deliberating group had access to all the same information as all of the bettors in a given prediction market. If your credence differs from the credence suggested from the betting market, would it be rational to conciliate? Cass Sunstein takes on this issue in a 2006 paper, “Deliberating Groups Versus Prediction Markets.” Sunstein points out that this is a particularly important case, as many of our decisions and credences come about through deliberation with others. Why should we expect this deliberative process to be desirable, especially relative to prediction markets? Indeed, as Sunstein argues, we should not expect deliberation to work better. We should actually expect it to be a less efficient way to aggregate information. Sunstein focuses primarily on two reasons: Group members failing to disclose what they know out of deference to the public information announced by others and social pressures leading members to not dissent from the group. As Sunstein writes, “Groups often amplify rather than correct individual errors; emphasize shared information at the expense of unshared information; fall victim to cascade effects; and tend to end up in more extreme positions in line with the predeliberation tendencies of their members” (192-3). On the other hand, prediction markets provide potential financial reward for individually held information and contrarian opinions, succeeding exactly where deliberation fails. Indeed, the profit motives makes uncommon knowledge especially profitable, where social, deliberative situations make group approved, desirable information most valuable. Thus, deliberation is, on average, a worse method of aggregation. One still ought to defer to the judgment of the prediction market. What about if you create another information aggregating mechanism to inform your credence on a given issue that you think may outperform a prediction market? There have been two notable recent attempts at this: Nate Silver in his elections forecasting and Philip Tetlock’s Good Judgement Project. In 2008, Nate Silver rose to prominence by using Bayesian statistical techniques to aggregate poll results, leading to highly accurate electoral predictions. Silver’s work provides a case study in whether advanced statistical techniques can aggregate information more effectively a prediction market. In 2009, economist David Rothschild tested Silver’s prediction against those suggested by a leading prediction market at the time, Entrade. He concludes, “I demonstrate that early in the cycle and in not-certain races debiased prediction market-based forecasts provide more accurate probabilities of victory and more information than debiased poll-based forecasts” (895). Rothschild’s technique is interesting. When he debiases Silver’s results, they become more accurate than the raw prediction market results. But, when he accounts for the favorite-longshot bias discussed earlier in the prediction market results, the debiased prediction market becomes most accurate. To put this into Elga’s framework, the prediction market makes for a better guru than Silver. Silver addresses the study directly in his book, The Signal and the Noise. He takes some issues with Rothschild’s methodology, that he debiases the prediction market results, and, more importantly, that the prediction markets move in response to Silver’s poll aggregation. Yet nevertheless, as Silver writes, “Over the long run, however, the aggregate forecast has often beaten even the very best individual forecast.” Silver is skeptical of the current state of prediction markets, thinking that there is not yet enough competition and the markets are still relatively thin, but is open to their potential superiority. Thus, Silver asserts the earlier caveat, that the current set of prediction markets, given the current legal restrictions on them, may suffer from the market thinness discussed. Philip Tetlock’s work on forecasting has also become an interesting potential challenge to prediction markets. In Tetlock’s Good Judgement Project, he sought out people who were outstanding at predicting the future over a number if years. He called this group “superforecasters.” In his book on the subject, Superforcasting, Tetlock describes testing the results of teams of superforecasters against prediction markets. His results: “Teams of ordinary forecasters beat the wisdom of the crowd by about 10%. Prediction markets beat ordinary teams by about 20%. And superteams beat prediction markets by 15% to 30%” (207). The result is fairly surprising, given the power of prediction markets. But, it is perhaps not entirely fair. As Tetlock admits, “I can already hear the protests from my colleagues in finance that the only reason the superteams beat the prediction markets was that our markets lacked liquidity: real money wasn’t at stake and we didn’t have a critical mass of traders. They may be right” (207). Interestingly, the argument is very similar to that of Silver, that the relatively small scale of current prediction markets suggests they are not operating as well as they could be. So, if you are a superforecaster working with a team of other superforecasters, perhaps your group’s combined judgement is sufficiently better than current prediction markets that you need not defer to them. But, this may cease to be true if better prediction markets were developed. So even between the narrow cases of Silver and Tetlock, the practitioners themselves are skeptical of their own ability to beat more robust prediction markets. And, this makes sense. As soon as a strategy develops an edge on prediction markets, they are incentivized to bet on that information until their information is fully incorporated into the betting market’s price. Indeed, a betting market can, as is actually encouraged, to subsume all other deliberation mechanisms into it until it obtains maximal accuracy. Staying Steadfast Against Your Superiors Let us assume you do not adopt the credence suggested by a prediction market because you wish to remain steadfast and think the credence suggested by the prediction market is incorrect. Bryan Frances discusses a similar epistemic situation in his piece, “Philosophical Renegades,” where an amateur astronomer retains her belief that Jupiter has fewer than 10 moons even after the vast majority of professional astronomers have come to believe the planet has over 200 moons. The astronomer has no concrete reason to reject the opinions of the expert astronomer community, but perhaps would say she expects that the others are making a mistake. This is not unlike the situation one is in disagreeing with a prediction market, as the prediction market is likely aggregating all available evidence in an effective manner. To some extent, the rationality of retaining one’s credence in the face of this disagreement depends upon how much one knows about prediction markets. If he or she were unaware of their epistemic virtues, the disagreement may be justified. But, if he or she understood prediction markets, their disagreement may be blatantly irrational. There is another interesting dimension to disagreeing with prediction markets, whether that be because you remained steadfast or because you have conditionalized on the suggested credence of the prediction market. In either of these situations, you should see yourself as having the opportunity to arbitrage. Let us assume, for example, that a prediction market suggests that the chance of Donald Trump being elected is P(.42), as PredictIt suggests at the time of writing. Let us also assume that your credence in Donald Trump being reelected is (.1). Given your credence of (.1), you would be rational to take a bet at 9/1 odds or better that Trump is not reelected. A prediction market at P(.42) would offer odds at 11/8. Indeed, if you really believe your credence is (.1), this should be seen as a profitable strategy over the long run. If you do not have an adversity to betting, then you should bet. Even if you treat the prediction market as a guru and conditionalize against its suggested probability, rationality would still suggest you bet against the market, as it would have positive expected value. Conclusion The disagreement literature discusses the different ways in which we should engage with our epistemic peers, inferiors, and superiors. As I have shown, we should look to prediction markets as our epistemic superiors, and as experts or gurus in Elga’s sense. I see this as being action guiding in a number of ways. First, if we wish to have more accurate credences about future events, we should create larger scale prediction markets. Second, when we have access to sufficiently thick prediction markets, we should defer to their suggested credences. To the extent one disagrees with a prediction market suggested credence, they should bet in the market as they would have a positive expected return. Works Cited Christensen, David Phiroze, and Jennifer Lackey. The Epistemology of Disagreement: New Essays. Oxford University Press, 2016. Elga, Adam. “Reflection and Disagreement.” Nous, vol. 41, no. 3, Sept. 2007, pp. 478–502., doi:10.1111/j.1468-0068.2007.00656.x. Fama, Eugene F. “Short-Term Interest Rates as Predictors of Inflation.” The American Economic Review, vol. 65, no. 3, June 1975, pp. 269–282., doi:10.1787/157052064225. Fama, Eugene F. “The Behavior of Stock-Market Prices.” The Journal of Business, vol. 38, no. 1, 1965, pp. 34–105., doi:10.1086/294743. Fama, Eugene F., and Burton G Malkiel. “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance, vol. 25, no. 2, May 1970, pp. 383–417., doi:10.2307/2325486. Frances, Bryan. Disagreement. Polity, 2014. Hanson, Robin, and Ryan Oprea. “A Manipulator Can Aid Prediction Market Accuracy.” Economica, vol. 76, no. 302, 2009, pp. 304–314., doi:10.1111/j.1468-0335.2008.00734.x. Hanson, Robin. “Decision Markets.” IEEE Intelligent Systems, vol. 14, no. 3, 1999, pp. 16–20. Malkiel, Burton G. “The Efficient Market Hypothesis and Its Critics.” Journal of Economic Perspectives, vol. 17, no. 1, 2003, pp. 59–82., doi:10.1257/089533003321164958. Rothschild, David. “Forecasting Elections.” Public Opinion Quarterly, vol. 73, no. 5, 2009, pp. 895–916., doi:10.1093/poq/nfp082. Silver, Nate. The Signal and the Noise. Penguin, 2013. Sunstein, Cass R. “Deliberating Groups versus Prediction Markets (or Hayek's Challenge to Habermas).” Episteme, vol. 3, no. 3, 2006, pp. 192–213., doi:10.3366/epi.2006.3.3.192. Tetlock, Philip E., and Dan Gardner. Superforecasting: The Art and Science of Prediction. Random House, 2016.

American Jews The Political Behavior of American Jews A Public Choice Approach to Israel-influenced Voting Jake Goodman Brown University Author Eli Binder Audrey McDermott Ethan Shire Editors Spring 2018 The paper analyzes the voting incentives created by the relationship between American Jews and American-Israeli foreign relations. At the founding of the Jewish State in 1948, the United States recognized the establishment of a Zionist state through a press release from President Truman on March 14, 1948 (U.S. Recognition of the State of Israel). The two main political parties in the United States— the Democrats and Republicans—have both since maintained consistent political, economic, and military support for Israel. This support has come to be viewed by American Jewish voters, most of whom desire support for Israel, as a public good provided by the United States Government. This public good has direct ramifications on voter incentives. However, despite bipartisan support for foreign aid to Israel, American Jews have remained consistently liberal. While social scientists have offered various theories of why American Jews became and remain Democratic, a cogent explanation can be offered through the lens of public choice economics. Indeed, Jewish liberalism demonstrates a political anomaly that can be explained through the framework of voter incentives. Before explaining the impact of pro-Israel policy on Jewish voting, it is necessary to identify some additional factors that evidence how Jewish voting behavior remains a political anomaly. American Jews, despite job and social discrimination, have become the highest per capita income of any religious group in the United States (Wright, Ethnic Group Pressures in Foreign Policy, 1982, 1655-1660). While affluence in America generally tends to correlate with Republican affiliation, this trend does not hold true for American Jews (Cohen, American Jewish Liberalism, 405-430). Steven Cohen and Charles Liebman, in their research, also noted that more religious Jews tend to be less liberal, inclining religious Jews toward conservatism. They identify only a few issues on which Jews assert themselves as decidedly liberal: political identity as liberal, church-state separation, social codes, and domestic spending. Cohen and Liebman’s research illustrated that aside from pro-Israel policies, Jews have additional incentives to shift to the Republican party, yet they have remained consistently Democratic. On the other hand, Jews have higher education levels, which correlate with liberalism, compared to the general populace provides a common explanation of Jewish liberalism. Thus, while Jews demonstrate anomalous behavior, they also demonstrate typical associations that explain Jewish liberalism. While many incentives influence Jewish political behavior, a single-issue factor that unites Jews remains the support of Israel from the United States government. Professor Lawrence Fuchs defined American Jews as an “ethno-religious group,” which forms attitudes on social and political policy that align group interests with national interests (Fuchs, The Political Behavior of American Jews, 1980). American Jews, as “partisans of Israel,” were thus instrumental in having the United States recognize the state of Israel (Fuchs, 1980). As Professor Steven Bayme noted, the pro-Israel consensus in the American Jewish community has been maintained remarkably well over the past sixty plus years, with the two primary oppositional sources, classical Reform and Satmar Hasidism, remaining largely uninfluential (Bayme, American Jewry and the State of Israel, 2008). To court the Jewish vote, Democrats and Republicans have functioned as “entrepreneurs selling policies for votes” — the policy, in this case, being bilateral economic assistance for Israel (Downs, An Economic Theory of Political Action in a Democracy, 1957). If we assume that American Jewish citizens behave as expected utility maximizers, Jewish voters gain extra expected utility from electing the more pro-Israel candidate, aligning with the Jewish voters’ preference for a pro-Israel public good. The gain to the Jewish voter would be defined as the preferred more pro-Israel candidate (Ferejohn & Fiorina, The Paradox of not Voting, 1974). Indeed, due to American Jewish attachment to Israel, there is a rational reason to vote; by voting for a more pro-Israel candidate in the political market, the Jewish voter ensures a higher quality public good that suits the Jewish voter’s preference for a more robust pro-Israel political platform. An initial investigation must depict the nature of the collective good thus described. As the natural monopoly on tax spending and military power, the government provides public goods to citizens. The United States government, having such a monopoly, becomes the sole provider of military and economic support to Israel for American citizens. Israel first received U.S. government assistance in the form of a $100 million loan from the Export-Import Bank in 1949 and aid remained modest for the next two decades (Sharp, Federation of American Scientists, 2016). After several consecutive Arab-Israeli wars, US aid to Israel increased dramatically, with Israel becoming the largest recipient of US aid in 1974. Middle East Specialist Jeremy Sharp reported that Israel is the largest cumulative recipient of US aid since World War II, receiving $124 billion of bilateral assistance in non-inflation adjusted terms (2016). An additional State Department directive this year has pledged $38 billion over the next ten years to Israel. The majority of this assistance has come in the form of Military aid, which has led to a qualitative military edge for the Israeli military, developing anti-rocket technologies such as the Iron Dome, Arrow I and II, and David’s Sling. The United States has also provided economic aid to Israel in the form of emergency aid packages during times of recession. Aid from the United States has thus allowed Israel to transition from a fledgling nation-state to a modern industrialized nation. (Sharp, Federation of American Scientists, 2016). While the United States government is not the sole supplier of aid to Israel, it functions as a monopoly within the US political market as a government supplier of aid. Jewish voters thus form preferences and expected utility functions based upon the differing levels of aid provided by the US government, a monopolistic supplier. To further analyze the impact of US foreign policy toward Israel on Jewish voting patterns, it is necessary to examine the historical political alignment of Jews, from Jeffersonian Republicans to Democrats to Republicans, prior to the establishment of Israel as a Jewish state. While Jewish political equality did not emerge directly out of the American revolution, Jews achieved political equality in the five states they were most numerous in, and the growing movement in revolutionary America for the separation of church and state worked to the Jewish community’s advantage (Fuchs, 1980, p. 24). The first instance of Jewish political alignment began with a Jewish attachment to the Jeffersonian Republicans; in the 1830s, Jackson and the new Democratic party gained the Jewish devotion Jefferson and Madison had maintained (Fuchs, 1980, p. 29). By 1840, a large majority of American Jewry, around 15,000 at the time, joined Martin Van Buren’s coalition, buoyed by Van Buren’s protection of Jews in Egypt (Fuchs, 1980, p. 30). With the immigration of as many as 100,000 German Jews to the United States between 1848 and the beginning of the Civil War, Jewish political alignment shifted, splitting support between Democrats and the Whigs (Fuchs, 1980, p. 33). By 1860, Jews in the North, particularly German-Jews, welcomed the new Republican Party, as many Rabbis and Jews opposed slavery (Fuchs, 1980, p. 35). In the four decades after the Civil War, Jews were widely divided with a slight major party preference for the Republican Party (Fuchs, 1980, p. 50). With the exception of Woodrow Wilson’s Jewish majority in 1916, Jews continued to lean Republican in presidential elections from 1900 to 1928 even with an influx of nearly two million Jewish immigrants fleeing anti-Semitism and poverty in Europe (Fuchs, 1980, p. 51). However, the 1920s showed a growing trend of Jewish support for the Democratic party, more rapid in certain cities but generally solidified by the Jewish commitment to Franklin Roosevelt in 1932 (Fuchs, 1980, p. 71). For example, in Boston’s Ward 14, a heavily Jewish area, 78 percent of enrolled voters were Republican in 1928, while only 14 percent of voters were Republican in 1952 (Fuchs, 1980, p. 72). The proportion of Jews who voted for the Democratic Party peaked at 90 percent for FDR in the 1940s (Rebhun, 2016, p. 141). To maintain Jewish support, the Democratic Party committed itself to fighting fascist anti-Semitism in Europe and to ensuring the military and economic security of the State of Israel (Schnall, 1987, p. 77). In all Presidential elections since 1932, 60 to 90 percent of American Jews voted for the Democratic candidate. (Rebhun, 2016, p. 141). While Jewish-American Democratic support has been in decline since the late 1960s, the Jewish vote has remained solidly within the Democratic camp (Rebhun, 2016, p. 143). Additionally, the Jewish vote declined in Republican support between 1980 and 2000 but has since risen from 2000 to 2016 (Kent, 2016). As evidenced by the above historical charting of Jewish political alignment, the Jewish community has shifted in partisan alignment multiple times in American history. Why then have Jews maintained their allegiance to the Democratic Party since 1932? While many factors are involved in addressing this question, a key factor absent in other eras of American history is the establishment of Israel in 1948 and the consequent United States’ support of Israel. The median voter theorem becomes especially relevant in addressing the Jewish-Democratic alliance. Anthony Downs observed that voters can cut the cost of information by comparing ideologies rather than policies — the lack of information thus engendering a demand for ideologies in the electorate (1957, p. 142). Downs reasons that stable government in a two-party democracy requires a distribution of voters approximating a normal curve in which both parties resemble each other closely (1957, p. 143). In terms of US-Israeli foreign policy, Democrats and Republicans resemble each other closely in that they have both maintained military and economic aid for Israel. According to the Median Voter Theorem, with both parties exhibiting similar ideologies of a pro-Israel consensus, one would expect the distribution to resemble a normal curve, but this has not been the case. Surprisingly, Democratic and Republican Israeli policy has had more in common than not; yet, a normal curve does not represent the Jewish vote. In the election of 1948, both party candidates were committed to Zionism, with both parties adopting pro-Israel positions in their national platforms (Fuchs, 1980, p. 81). Truman’s election allowed the Democratic party to yield pro-Israel results, beginning with Truman’s recognition of Israel, the $100 million loan from the Export-Import Bank in 1949, and the Tripartite Declaration of 1950 (Sharp, 2016, p. 36). Lawrence Fuchs identified 1952 as a key moment in the political market for the Jewish vote, in which despite being as “well paid, fed, and educated as the most successful Republican denomination groups” Jews continued to vote for Democrats (1980, p. 99). Eisenhower’s term, however, allowed for product differentiation in the political market; Jews could now compare the quality of the collective good provided by the United States government, economic and political aid to Israel, under two different political parties. Indeed, while several factors, as Lawrence Fuchs noted, contributed to Jewish loyalty to the Democratic party, the Eisenhower Administration's policy toward Israel hurt Republican chances with Jewish voters; Zionist rallies were held in October of 1954 protesting the Eisenhower Administration’s policy towards Israel (Fuchs, 1980, p. 117). Fuchs indicated that Zionist leaders criticized the Eisenhower Administration's decision to ship arms to “feudal Arab leaders” while holding back on Israeli military aid (Fuchs, 1980, p. 117). The Suez Canal, in which the United States strengthened its bond with Egypt and forced military Israeli withdrawal, provided another demonstration of Eisenhower’s lukewarm position toward Israel (“Suez Crisis, 1956,” n.d.). Weak Republican support for Israel did not shift Jewish political alignment to its benefit; American Jews thus exhibited a lopsided preference for Democratic US-Israeli policy during the 1960 election of John F. Kennedy, with around 80 percent voting for Kennedy and 18 percent voting for Nixon — a major shift from the 1956 election in which 60 percent voted for Stevenson while 40 percent voted for Eisenhower (Weisberg, 2012, p. 217). Post-1948, several Republican administrations have seen fluctuations in their capturing of the Jewish vote. Professor Theodore Wright, writing in 1982, noted that in recent years Republicans had sought to “outbid the Democrats” in their promises to the Zionist state. Indeed, the election of Ronald Reagan demonstrated a partisan shift in the political market in reaction to the Israel policies of the Democratic Carter Administration. Professor Weisberg cited data showing that many Jews felt Carter was too hard on Israel and consequently 39 percent voted for Reagan and 45 percent voted for Carter (Weisberg, 2012, p. 228). This represented a major shift in the partisan distribution of Jewish voters, nearly approaching Downs’s normal distribution curve. However, despite Reagan’s policies being more pro-Israel than Carter’s, the Democratic party regained the Jewish vote in the 1984 presidential election, with 67 percent voting for Walter Mondale and 31 percent voting for Ronald Reagan (Weisberg, 2012, p. 228). Professor Weisberg notes that while Republicans saw a boost in their attainment of the Jewish vote in the 1970s and 1980s, it was followed by subsequent loss of the Jewish vote in the 1990s and 2000s (Weisberg, 2012, 232). However, another interesting data point occurred in 2012. The highly-publicized testiness of Obama’s relationship with Israeli Prime Minister Benjamin Netanyahu and “dissatisfaction with Obama’s Middle East policy” during his first term boosted the Jewish Republican vote by 9 percentage points, from 21 percent for McCain to 30 percent for Romney (Rebhun, 2016, p. 144). The Republican resurgence was squashed in the 2016 election, falling to 24 percent for Trump despite visible strain in the Obama-era US-Israeli diplomatic relations. These various historical examples indicate that shifts in the partisan alignment of the Jewish vote occur in accordance with a greater expected utility of Republican Israeli policy after a strain in Democratic-Israel relations. Nonetheless, while Jewish voters demonstrate small shifts in political alignment, they often return to a high percentage of votes for the Democratic presidential candidate. This is a noteworthy behavior; if Republicans have proven to Jewish voters that they can successfully compete with Democrats with their pro-Israel policies, why have more Jews not shifted to the Republican party? Arye Hillman accounted for such a phenomenon by considering the expressive-voting hypothesis, which posits that certain people vote “to obtain the expressive utility from confirming identity” to themselves or a group rather than to decisively sway an election (2011, p. 250). Because American Jews have historically aligned with the Democratic Party, Hillman assumed that Jews, with exceptions, rationally vote for Democrats, though it is against their self-interest, in order to gain the expressive utility associated with expressing group identity (2011, p. 256). Hillman offered a variety of historical examples from Podhoretz’s book Why Are Jews Liberals?. In the 1960’s election, he noted that Kennedy’s father was openly anti-semitic, yet Kennedy secured 82% of the Jewish vote (Hillman, 2011, p. 254). In 1972, he cited that the Democrat McGovern received two-thirds of the Jewish vote despite McGovern favoring racially-based quotas in education that would have been disadvantageous to Jews and be inimical to the state of Israel (Hillman, 2011, p. 254). Additionally, in 2008, 78 percent of Jews voted for Obama despite Obama having “anti-Israel associations” and a record that showed less concern for Israel than his Republican opponent (Hillman, 2011, p. 255). There are obviously limits to how much Jewish identity impacts voting decision and how much Jewish identity is tied to Israel. However, despite its assumptions about Jewish identity, Hillman’s evidence provides a theoretically relevant public choice explanation of why Jews may rationally vote for Democrats despite competitive pro-Israel policies from the Republican Party. Rather than functioning as a singular issue which ultimately sways the Jewish voter, the Jewish preference for a robust pro-Israel policy represents a unique and influential indicator within the multifaceted preferences of the Jewish voter. By examining historical presidential voting data, specific instances when Jewish voters could have voted according to a pro-Israel preference based upon the partisan performance of the previous administration can be identified. While this analysis has been largely driven by market outcomes – Jews evaluating their voting decisions based off of the Israeli policy of the current administration – it highlights the impact of information on voting patterns. If a Jewish voter is provided with more information, via four years of governance by a certain party, about the perceived ideology of either political party, they will adjust their preferences according to this new information. While Downs notes there are costs to acquiring such information, the marginal return, or the increase in utility from making an improved decision concerning partisan Israeli-relations ideology, would presumably exceed the marginal cost of acquiring such information for Jewish voters who decide to vote. However, while it is important to analyze the behavior of Jews as an ethnic group, there exist differences within the Jewish community which should also be examined. Laurence Kotler-Berkowitz and Lawrence Sternberg researched the influence of the centralized institutions of the American Jewish community on political cohesion and division amongst Jews (2000, p. 23). The researchers amalgamated data proving that the political activists within major Jewish institutions in the United States, such as the Jewish Community Relations Council and the organized Federation system, display differences in measures of ideology, partisanship, political and social attitudes, and policy preferences than most synagogue members and donors and are decisively more liberal (2000, p. 40). Their research demonstrated that the participants in the most centralized set of Jewish institutions display political preferences “within a fairly narrow range, denoting political cohesion” (2000, p. 44). Kotler-Berkowitz and Sternberg’s research also showed that while Jews tend to lean liberal, the degree of cohesion within the American Jewish community should not be assumed to be absolute. For example, political division among American Jews, despite the overall liberalism of Jewish institutions, allows for the opportunity of Republican competition in the markets, specifically in the more traditional Jewish communities. Republicans have particularly thrived among Orthodox Jews, who are the most Republican in their voting (Weisberg, 2012, p. 225). Eytan Gilboa traced the historical arc of Jewish support for Israel and the complicated relationship between Jews and specific Israeli policy preferences. Beginning in 1948, he notes that 90 percent of American Jews supported the establishment of Israel and the decision of President Truman to recognize the State of Israel (Gilboa, 1986, p. 113). According to public surveys from 1957 to 1983, Jews remained highly favorable toward Israel, with all but one of the pro-Israel results ranking above 90 percent (Gilboa, 1986, p. 113). Gilboa’s research also notes that all surveys of American Jews in his research show overwhelming support for US aid to Israel — around 91 to 96 percent from 1971 to 1985 (Gilboa, 1986, p. 117). However, Gilboa also investigated public opinion surveys that show a less unified American Jewish community from 1967 to 1982 concerning positions and policies in the Arab-Israeli conflict (Gilboa, 1986, p. 121). Surveys between 1980 and 1984 further evidence a split Jewish opinion on the question of a Palestinian state (Gilboa, 1986, p. 123). The conclusion of Gilboa’s paper highlights the remarkable stability of Jewish support for economic and military aid for Israel despite diverging foreign policy positions of American Jewry. Gilboa’s data and conclusions highlight an interesting complication of the Jewish political market; American Jews, while supporting aid, may not uniformly support the same policy results. The complex interactions between Zionism, ethno-religious political behavior, and political support for Israel highlights the lack of information politicians acquire about the Jewish community and also provides evidence of why US aid for Israel has been sustained for so long. An additional complication is that the Jewish voting is not the only group incentivizing pro-Israel policy. In fact, since 1989, Israel’s favorability among general Americans has vacillated between 45 percent and 79 percent (Saad, 2016). Republicans have additional political incentives to support Israel that may influence the Jewish vote. Evangelical Christians, who number about 75 million in the United States, have become “increasingly mobilized” in support of Israel (Waxman, 2010, p. 15). Since the Second Intifada, which began in 2000, the Christian Right has become increasingly influential in the Republican political market. According to Professor Murray Friedman, the Christian Right, while showing strong support for Israel, disincentivized Jews from joining the Republican party out of fear that the Christian Right has become “too influential” in the GOP (2003, p. 436). The influence of the Christian Right on Republican foreign policy highlights that while Republicans compete with Democrats for the Jewish vote with pro-Israel policy, they also compete for the vote of the Christian Right through pro-Israel policy. Additionally, the bedrock of evangelical support for Israel has shifted incentives for Jews to vote as single-issue voters; support for Israel remains ensured for by the prominent support for pro-Israel candidates on the Right vying for the support of evangelists, allowing Jewish voters flexibility to vote for Democrats who may not be as pro-Israel as the Republican candidate. In recognizing that pro-Israel policy has not yielded strong Jewish electoral results, Republicans have continued to maintain pro-Israel policy because the Christian Right has incentivized them to do so. Thus, while the political market for the Jewish vote remains influenced by a multitude of factors, the widespread preference among Jewish voters for a pro-Israel collective good shifts incentives in the political market. How Jews collectively vote remains complex, and the historical Jewish alignment with the Democratic Party despite competitive pro-Israel policy from the Republican Party highlights this complexity. It seems likely that two trends will continue based on the political incentive structures described in this paper: Jews will continue to predominantly align with the Democratic Party and both Democrats and Republicans will continue to offer competitive pro-Israel ideologies. The public choice approach to Jewish political behavior thus offers insight into why these trends continue by examining the incentives that shape how Jews vote and how politicians respond in turn. References Aldrich, J. H. Rational choice and turnout. American Journal of political science, 1993: 246-278. Bayme, S. AMERICAN JEWRY AND THE STATE OF ISRAEL: HOW INTENSE THE BONDS OF PEOPLEHOOD? Jewish Political Studies Review, 20(1/2), 2008: 7-21. Retrieved from http://www.jstor.org/stable/25834774 Baker, P. For Obama and Netanyahu, a Final Clash After Years of Conflict. 2016. Retrieved April 02, 2017, from https://www.nytimes.com/2016/12/23/world/middleeast/israel-benjamin-netanyahu-barack-obama.html Cohen, S., & Liebman, C. American Jewish Liberalism: Unraveling the Strands. The Public Opinion Quarterly, 61(3), 1997: 405-430. Retrieved from http://www.jstor.org/stable/2749579 Downs, A. An Economic Theory of Political Action in a Democracy. Journal of Political Economy, 65(2), 1957: 135-150. Retrieved from http://www.jstor.org/stable/1827369 Ferejohn, J. A., & Fiorina, M. P. The paradox of not voting: A decision theoretic analysis. American political science review, 68(02), 1974: 525-536. Fuchs, L. H. The Political Behavior of American Jews. Westport, CT: 1970. Greenwood Press. http://www.jstor.org/stable/4371453 FRIEDMAN, M. The Changing Jewish Political Profile. American Jewish History, 91(3/4), 2003. 423-438. Retrieved from http://www.jstor.org/stable/23887289 Gilboa, E. Attitudes of American Jews Toward Israel: Trends Over Time. The American Jewish Year Book, 86, 1986: 110-125. Retrieved from http://www.jstor.org/stable/23604779 Hillman, A. Expressive voting and identity: Evidence from a case study of a group of U.S. voters. Public Choice,148(1/2), 2011: 249-257. Retrieved from http://www.jstor.org/stable/41483691 Kent, D. Presidential vote by religious affiliation and race. 2016. Retrieved March 28, 2017, from http://www.pewresearch.org/fact-tank/2016/11/09/how-the-faithful-voted-a- preliminary-2016-analysis/ft_16-11-09_relig_exitpoll_religrace/ Kotler-Berkowitz, L., & Sternberg, L. THE POLITICS OF AMERICAN JEWS: COHESION, DIVISION, AND REPRESENTATION AT THE INSTITUTIONAL LEVEL. Jewish Political Studies Review, 12(1/2), 2000: 21-54. Retrieved from http://www.jstor.org/stable/25834469 REBHUN, U. POLITICAL ORIENTATION. In Jews and the American Religious Landscape (pp. 134-164). 2016. New York: Columbia University Press. Retrieved from http://www.jstor.org/stable/10.7312/rebh17826.9 Saad, L. Americans' Views Toward Israel Remain Firmly Positive. 2016. Retrieved April 06, 2017, from http://www.gallup.com/poll/189626/americans-views-toward-israel-remain-firmly-positive.aspx Schnall, D. REPUBLICANS, DEMOCRATS AND AMERICAN JEWS. Tradition: A Journal of Orthodox Jewish Thought, 22(4), 1987: 75-87. Retrieved from http://www.jstor.org/stable/23259491 Sharp, J. M. Federation of American Scientists [Scholarly project]. 2016. Retrieved March 20, 2017, from https://fas.org/sgp/crs/mideast/RL33222.pdF Suez Crisis, 1956. (n.d.). Retrieved March 30, 2017, from https://2001-2009.state.gov/r/pa/ho/time/lw/97179.htm U.S. Recognition of the State of Israel. (n.d.). Retrieved March 20, 2017, from https://www.archives.gov/education/lessons/us-israel Waxman, D. The Israel Lobbies: A Survey of the Pro-Israel Community in the United States. Israel Studies Forum,25(1), 2010: 5-28. Retrieved from http://www.jstor.org/stable/41805051 Weisberg, H. Reconsidering Jewish Presidential Voting Statistics. Contemporary Jewry,32(3), 2012: 215-236. Retrieved from http://www.jstor.org/stable/43549743 Wright, T. Ethnic Group Pressures in Foreign Policy: Indian Muslims and American Jews. Economic and Political Weekly, 17(41), 1983: 1655-1660. Retrieved from http://www.jstor.org/stable/4371453

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A More Perfect Union Inclusive Norms and the Future of Liberal Unity Benjamin Seymour Brown University Author Ginevra Bulgari Vance Kelley Julia Rock Jakob Wells Editors Spring 2018 This essay analyzes the most dire threats to political unity today b y critiquing historical approaches to this subject. Given the sprawling apparatus of the modern state, it’s easy to wonder how such an entity—one that requires the complex and cumbersome coordination of complete strangers every day—exists and persists at all. Indeed, endless tomes of regulations guide this bureaucratic behemoth’s daily affairs; and yet, these volumes seem inadequate to address the philosophical question of what motivates humanity to come together despite differences and form a project directed toward mutual advantage and a common good. An answer to this question would need to identify a more essential aspect of our constitution as persons, a continuity that underlies the diverse interests and identities that coexist in a state. Generations of political theorists have grappled with the problem of national unity and, through their attempts to theorize this fundamental impulse, realized that unity is the sine qua non condition of possibility for the state; therefore, upholding this unity is of vital importance for national stability and longevity. The German political theorist Carl Schmitt, who was an active member of the Nazi party, virulent anti-Semite, and chief architect of the Third Reich’s justificatory underpinnings, was chiefly concerned with national unity. He uses his principle of national unity as homogeneity and exclusion to challenge the inclusive liberal notion of unity through shared values, by arguing that the liberal approach poses an existential threat to the survival of the state. Despite the clarity and thoroughness of Schmitt’s critique of liberalism, liberal political thinkers such as John Rawls and Jürgen Habermas remain unconvinced by Schmitt’s account and instead defend the liberal conception of unity, which avoids the drastic conclusions and totalitarian implications of Schmitt’s thought. While Rawls’ responses to Schmitt’s normative arguments prove compelling, Habermas, by recognizing the central importance of identity in Schmitt’s critique, lays the groundwork for a new defense of liberal unity that retains a substantive interest in questions of national identity. To reformulate and reaffirm the liberal notion of unity, this paper will: (I) explore Schmitt’s notion of national unity through enmity as a critique of liberal inclusivity; (II) examine Rawls’ account of overlapping consensus as a foundation for social unity that resists Schmitt’s most problematic commitments; (III) clarify how Habermas’ preoccupation with identity further strengthens the Rawlsian notion of liberal unity against Schmittian ethno-nationalism; and finally (IV) realize Habermas’ conception of inclusive unity by, counter-intuitively, embracing the very fragmentation of social identities that appears to be the greatest threat to national unity today. Rooted in radical exclusion and the constant threat of violence, Schmitt’s conception of the political situates unity in a homogenous populace’s allegiance against a common enemy. As an inheritor of German existentialist thought, Schmitt analyzes political life with a systematic approach that emphasizes an ontological and philosophical hierarchy, wherein certain concepts are metaphysically prior to higher-order notions. The absolute foundation of this hierarchy, from which all political entities ultimately derive, is Schmitt’s conception of the political. Indeed, the first sentence of his treatise, The Concept of the Political, confirms this hierarchical approach: “The concept of the state presupposes the concept of the political” (Schmitt, The Concept of the Political, 19). For Schmitt, a concept only derives its meaning by referring to a concrete reality in the world. While the referent of the more intuitive concept of the state is the state’s sprawling apparatus and daily operations, Schmitt believes that his more fundamental notion of the political denotes an equally tangible reality. Schmitt’s famous friend-enemy distinction instantiates the concept of the political within his system. As a theorist whose philosophy is defined by its political principle of radical negation and exclusivity, Schmitt believes that every discourse is defined by an insoluble antithesis or distinction. Like the contrasts between good and evil in ethics, beautiful and ugly in aesthetics, and profitable and unprofitable in economics, Schmitt contends that the political is defined by the antithesis between friend and enemy. Such a reductionist analysis establishes the political as independent from moral questions and postulates the friend-enemy distinction as ontologically irreducible: The political enemy need not be morally evil or aesthetically ugly; he need not appear as an economic competitor, and it may even be advantageous to engage with him in business transactions. But he is, nevertheless, the other, the stranger; and it is sufficient for his nature that he is, in a specially intense way, existentially something different and alien, so that in the extreme case conflicts with him are possible (Schmitt, The Concept of the Political, 27). The dehumanizing and fascistic possibilities of a conception of politics based on a distinction that treats another person as existentially alien marks Schmitt’s philosophy as a clear antipode to liberal notions of equality and intuitive morality. But Schmitt’s existentialist conception of meaning imbues his notion of the political with a dangerous urgency, as the concrete referent of the friend-enemy distinction, and thus the very concept of the political itself, is the constant and real possibility of physical violence with the enemy. By establishing a principle of difference, negation, and enmity as the foundation of his conception of politics, Schmitt makes his principle of unity the ontological epicenter of his philosophical project. Fully aware of the power of the fear and hostility on which his notion of the political is founded, Schmitt contends that only the sheer force of the friend-enemy distinction is sufficient to fuse a collection of individuals into a genuine social unit. Schmitt’s emphasis on collectivity is likewise essential to his understanding of the political. The friend and enemy of Schmitt’s antithesis necessarily refer to collectives, transforming these enemies into public enemies and these friends into the other members of one’s political group. Thus, the concept of the political only becomes efficacious by virtue of the shared quality of the friend-enemy distinction. But when a group of individuals is united, through a common and homogenous sense of who the friends and the enemies are, it partakes in the sublime force of the political, which transfigures this collective into an entirely new kind of entity—a people. In Schmitt’s ontological hierarchy of politics, a people are second only to the political antithesis that defines and unites them. Yet a new property emerges at the higher metaphysical order of a people that both allows for the possibility of an organized state and proves significant to another dimension of Schmitt’s critique of liberalism: “If such an entity [of a people] exists at all, it is always the decisive entity, and it is sovereign in the sense that the decision about the critical situation, even if it is the exception, must always necessarily reside there” (Schmitt, The Concept of the Political, 38). By virtue of its sovereignty, which Schmitt equates with an ability to make certain decisions, a homogenous people becomes capable of forming the institutions and norms of a state. Like his conception of political unity through radical exclusion, Schmitt’s formulation of sovereignty similarly challenges another fundamental liberal tenet: the commitment to norms exemplified by the rule of law. As set forth in his collection of essays, Political Theology, Schmitt’s notion of sovereignty receives a succinct expression in the book’s famous first sentence: “Sovereign is he who decides on the exception” (Carl Schmitt, Political Theology: Four Chapters on the Concept of Sovereignty, 5). Related to the idea of a state of emergency, the exception refers to an abnormal situation in which the Schmittian sovereign decides that the general rules do not apply. In this exceptional situation, the sovereign then suspends the general norms and acts by virtue of its own authority. Thus, for Schmitt, a law or norm is only legitimate when it is recognized by the ontologically prior sovereign power, yet this recognition consists precisely in the sovereign acknowledging its own authority to suspend or violate this rule in exceptional cases. By arguing that norms are only defined by their exceptions and limits, Schmitt undermines the liberal commitment to the rule of law, which insists that sovereign powers are not exempt from their own laws and norms. Schmitt’s critique of liberalism thereby rejects a normative approach to politics that extends back to the Magna Carta and inscribes authority within definite bounds. An even more disturbing feature of Schmitt’s notion of sovereignty, however, is that the ambiguous phrase “on the exception,” means not only that the sovereign decides in exceptional cases, but also that the sovereign decides which cases are to be treated as exceptional. As Schmitt writes: “He [the sovereign] decides whether there is an extreme emergency as well as what must be done to eliminate it. Although he stands outside the normally valid legal system, he nevertheless belongs to it, for it is he who must decide whether the constitution needs to be suspended in its entirety” (Carl Schmitt, Political Theology: Four Chapters on the Concept of Sovereignty, 7). The sublime and even transcendent authority that Schmitt attributes to the sovereign is problematic beyond merely challenging the rule of law, which forms the very foundation of the liberal constitutional state—since sovereign authority ontologically derives from the political, Schmitt argues that the unchecked power of the sovereign must therefore serve to maintain and strengthen this antagonistic principle of unity. Thus, according to Schmitt, the state must act in such a way that most promotes the homogenous unity of the political, upon which the very possibility of a state depends. Schmitt’s ontological hierarchy, by exalting his notion of the political as the unity of a sovereign people, imbues political entities with a telos. The political, as the foundation of all public associations and institutions, also becomes their vital principle and their ultimate purpose. In Constitutional Theory, Schmitt’s most influential legal text, the sinister principle of national unity assumes a more concrete and recognizable form. Fundamental liberties, as established in this text, are usually non-political in the sense that they attach to individuals in their private lives or in a non-social manner. For example, freedom of worship is a basic liberty that, according to Schmitt, should be respected by the state as long as one’s religious views or practices merely affect one’s private behavior. This right could be suspended if members of a certain religion used their faith as a vehicle for political change, as in the case of the Civil Rights Movement or the Indian Independence Movement. While Schmitt recognizes that there are often de facto limits to the political in a state, there is no limiting principle to stop the intrusive expansion of the political. Thus, the reach of the political can and even should expand if it serves to strengthen national unity. To pursue our example, the sovereign could decide to suspend even the right to privately believe in a certain religious doctrine if the sovereign decides that this doctrine is affiliated with its Schmittian enemy. This expansion of the realm of the political, if continued, culminates in what Schmitt celebrates as the ideal of the “total state,” in which all aspects of life are re-politicized and thereby subsumed into an all encompassing friend-enemy distinction: “Every religious, moral, economic, ethical, or other antithesis transforms into a political one if it is sufficiently strong to group human beings effectively according to friend and enemy” Schmitt, The Concept of the Political, 37). The total state in which everything reflects and strengthens the friend-enemy distinction would, for Schmitt, possess the highest possible degree of political unity, as its people would have a completely homogeneous sense of friend and enemy. It requires no small leap of the imagination to see how Schmitt’s ideal of the total state coincided with Nazism, which attempted to build an empire based on an ethnic friend-enemy distinction that indeed encompassed all aspects of life. Yet despite this repulsive extremism, Schmitt’s model is a considerable challenge to liberalism—one that requires a liberal response that can defend an inclusive account of national unity and a norm-based approach to politics that leaves the rule of law intact. Rawls provides a liberal antidote to Schmitt by formulating an inclusive conception of national unity based on shared norms. John Rawls proved to be a preeminent liberal philosopher by offering analyses of the principles underlying modern constitutional democracies, distinguished by Rawls’ interest in promoting the just and fair treatment of all members of these societies. Indeed, Rawls’ background in Kantian moral philosophy is evident in his persistent belief in the equal dignity of persons—a liberal tenet that Schmitt rejects through the ontological inequality imbedded in his friend-enemy distinction. In place of the exclusion and homogeneity that suffuse Schmitt’s conception of the political, Rawls affirms an inclusive principle of unity that is woven into the very fabric of his philosophical system as a crucial background assumption. In Political Liberalism, Rawls describes how he assumes a plurality of different worldviews to be a fundamental feature of liberal democracies: “the diversity of reasonable comprehensive religious, philosophical, and moral doctrines found in modern democratic societies is not a mere historical condition that may soon pass away; it is a permanent feature of the public culture of democracy” John Rawls, Political Liberalism, 36). Rawls defines comprehensive doctrines as complete and fully realized normative worldviews. In his assumption, Rawls flatly rejects the homogeneity that Schmitt argues is the essence of political unity. Though this assumption appears to be a factual claim about the nature of liberal democratic societies, Rawls gives this claim normative weight by distinguishing between the notion of mere pluralism—wherein members of a society subscribe to different comprehensive doctrines—and that of reasonable pluralism. For Rawls, reasonable pluralism refers to the idea that free institutions actually promote a diversity of comprehensive doctrines that a reasonable person could subscribe to. As a radically pluralistic and inclusive notion, reasonable pluralism, as a fundamental feature of liberal democracies, creates the space in which democratic deliberation and debate can occur. As a vital condition for the proper functioning of a democratic and liberal society, reasonable pluralism ensures that inclusivity and diversity occupy a fundamental position in Rawlsian liberal society. But this rebuke of Schmitt’s notion of the political, as defined by the friend-enemy distinction, does not yet provide an alternative account of national unity. Through his notion of overlapping consensus, Rawls proposes a theory of national unity grounded in shared norms and similarity across difference. Given the profound diversity of individuals’ values within a liberal society that reasonable pluralism implies, national unity, at least from the perspective of Schmitt’s critique, appears precarious. Yet Rawls denies that national unity is unattainable in liberal democracies, by exploring the distinction between an individual’s comprehensive doctrine and their non-comprehensive political views. Along these lines, two individuals—for example a Christian fundamentalist and a socialist atheist—could deeply disagree over many issues by virtue of their conflicting comprehensive doctrines; however, they might also hold some political views in common, like a commitment to the right to free speech. Thus, despite the radical heterogeneity and diversity of worldviews in a multicultural liberal society, there are certain principles that Rawls argues would be shared amongst opposing but reasonable comprehensive doctrines. These shared principles, to which any reasonable person would assent, constitute Rawls’ notion of the overlapping consensus, which unites individuals whose comprehensive doctrines may nonetheless be extraordinarily different. As establishing a common national commitment to certain principles, the overlapping consensus serves to unite a reasonably pluralistic society around inclusive norms. Rawls also frames his discussion of the overlapping consensus in explicitly normative terms, beyond the mere fact that the overlapping consensus is a collection of normative principles, by relating the overlapping consensus to liberal notions of legitimacy and autonomy: Since political power is the coercive power of free and equal citizens as a corporate body, this power should be exercised, when constitutional essentials and basic questions of justice are at stake, only in ways that all citizens can reasonably be expected to endorse in the light of their common human reason (Rawls, Political Liberalism, 139-140). Rawls’ insistence on certain limiting conditions under which coercive political power should be employed reveals a striking divergence from Schmitt’s unlimited notion of sovereign authority. Only authority exercised within these limits is legitimate in the Rawlsian sense. Furthermore, Rawls’ particular formulation of legitimacy is intimately related to the notion of autonomy, which literally means self-lawgiving. Since political coercion is only legitimate when any reasonable individual would assent to it, the state’s sovereign authority is strictly limited by the overlapping consensus, i.e. what reasonable citizens would mutually agree to. In stark contrast to Schmitt’s unlimited notion of sovereignty as rooted in a unifying principle of profound exclusion and homogeneity, Rawls outlines a liberal notion of unity through an overlapping consensus that emphasizes shared norms across reasonable differences and inscribes the state’s coercive authority within determinate limits. Rawls’ insistence on the rule of law and an inclusive notion of national unity becomes even more apparent through the concrete and realized form it assumes in Rawls’ reflections on the importance of constitutions for liberal societies. For Rawls, constitutions perform the essential function of codifying certain shared and fundamental values—aspects of the overlapping consensus—to ensure that they are consistently respected. In contrast to Schmitt, Rawls is an adamant supporter of the rule of law, who affirms the importance of consistently and impartially upholding rules. In A Theory of Justice, Rawls devotes a section to the rule of law, wherein he provides a simple and intuitive counter-argument to Schmitt’s contention that a rule is essentially defined by its ability to be suspended in exceptional cases: “The rule of law also implies the precept that similar cases be treated similarly. Men could not regulate their actions by means of rules if this precept were not followed” (Rawls, A Theory of Justice, 237). Indeed, under a regime whose laws are frequently suspended or changed by the sacrosanct power of the sovereign, it would be prohibitively difficult to follow laws at all, given their constant mutability. Like Schmitt, however, Rawls argues that constitutions should and do reinforce his notion of national unity in important ways. First, the constitution provides specific procedures for conflict resolution that diffuse intra-societal tensions, instead of merely redirecting these antagonistic energies toward a common enemy. Second, Rawls claims that a state’s constitution, when successful, can reinforce reasonable pluralism and foster a positive feedback loop that stabilizes and unites the diverse members of a liberal society under their shared values and institutions: The basic political institutions incorporating these principles and the form of public reason shown in applying them when working effectively and successfully for a sustained period of time (as I am here assuming)—tend to encourage the cooperative virtues of political life: the virtue of reasonableness and a sense of fairness, a spirit of compromise, and a readiness to meet others halfway, all of which are connected with the willingness to cooperate with others on political terms that everyone can politically accept (Rawls, Political Liberalism, 163). In a gesture similar to Schmitt’s claim that the constitution must serve the telos of his exclusive conception of national unity, Rawls maintains that the constitution can be an important component in securing unity in a pluralistic liberal society by strengthening certain common virtues that promote inclusivity. Rawls therefore formulates a liberal conception of national unity that offers an attractive alternative to Schmitt’s vision of unity through a mutual enemy. Indeed, Rawls’ response to Schmitt also seems far better equipped to handle the multicultural realities of an increasingly globalized world, whose largest and most prominent states are and continue to become ever more pluralistic. While Rawls’ responses to Schmitt fail to explicitly address the problematic role of identity in Schmitt’s critique of liberal unity, Habermas addresses this issue from a liberal perspective similar to Rawls’. Although educated in different philosophical traditions, Rawls and Habermas share commitments to many fundamental liberal values. Like Rawls, Habermas begins with the factual assumption that contemporary liberal democracies are defined by their multiculturalism and plurality of worldviews. Given this diversity, Habermas likewise claims that these disparate groups can be brought together through shared norms and an inclusive attitude that rejects the radical homogeneity of the Schmittian political. Despite these shared preoccupations between Rawls and Habermas, their divergent emphases reveal crucial aspects of their philosophical vantage points. For example, Habermas imbues the question of national unity with an urgency and importance comparable to Schmitt. Although Rawls undeniably thought about and wrote on the question of national unity with acuity and insight, Schmitt and Habermas examine the threat of political fragmentation as fundamental because of their shared German inheritance of a national history marked by perennial partition and disunity. In contrast to both Schmitt and Rawls, however, Habermas turns to a nation’s constitution to provide—not merely a supportive element in fostering a unified national community—but a veritable foundation for a unified and inclusive liberal state. Referring to this political model as “constitutional patriotism,” Habermas proposes an alternative liberal principle of unity, one highly related to and coherent with Rawls’ liberal project, that Habermas argues can challenge Schmitt’s claim that liberal inclusivity cannot provide a substantive identity to the members of a society. Habermas’ groundbreaking essay, “The Postnational Constellation and the Future of Democracy,” explores how globalizing forces have fundamentally altered identity-forming processes in a way that renders unity through nationalist identities no longer viable. By reflecting on the contemporary prevalence of immigration, the complex ways in which localities interact with globalized mass media, and the ease of communication across national and cultural lines, Habermas arrives at the conclusion that people have adapted a new sense of identity in response to these multifarious forces. Because ‘traditional’ modes of identity, in the nineteenth century for example, were more stable and consistent across localities, identifying with a particular town, religion, nation, and worldview was a more socially unifying and coherent process. Habermas contends that today, however, a single individual might identify with multiple hometowns, two or more national heritages, and a familial as well as a personal religious identity. Habermas vividly describes: [T]he dynamic image of an ongoing construction of new modes of belonging; new subcultures and lifestyles, a process kept in motion through intercultural contact and multiethnic connections. This strengthens a trend toward individualization and the emergence of ‘cosmopolitan identities,’ already evident in postindustrial societies Habermas, "The Postnational Constellation and the Future of Democracy," 76). This process, whereby interaction with global forces leads individuals to adopt layered identities, simultaneously threatens traditional models of national unity and underscores the need for a more inclusive and norm-based model of political unity. Undoubtedly, Schmitt’s conception of political unity would qualify as a ‘traditional,’ model of national belonging, whose unqualified insistence on the importance of national homogeneity does not seem capable of prevailing under these new conditions. Indeed, Habermas writes that Schmitt’s friend-enemy distinction most often appears along ethnic lines, as in the case of National Socialism, although for Habermas this is a historically contingent fact. Regardless, Habermas considers Schmitt’s notion of the political a reflection of the ethnonationalist conception of national identity whose unity is predicated on a sense of belonging to a shared heritage: “‘ethnonationalism’ blurs the traditional distinction between ‘ethnos’ and ‘demos.’ This expression emphasizes the proximity between an ‘ethnos,’ a pre-political community of shared descent organized around kinship ties, on the one hand, and a nation constituted as a state that at least aspires to political independence on the other” (Habermas, "On the Relation between the Nation, the Rule of Law and Democracy," 130). The absolute nature of Schmittian homogeneity, especially when considered along ethnic lines, appears all the more reactionary and unviable in light of Habermas’ account of contemporary, complex identity formation. Thus, Habermas proposes constitutional patriotism as an inclusive way of identifying with the national community that opposes Schmittian ethnonationalism. Like the liberal commitment to shared norms and inclusive pluralism outlined by Rawls, Habermas’ constitutional patriotism entails a national culture that identifies with the values embodied by that nation’s constitution. Since liberal democratic constitutions use highly generalized language in order to encompass as many situations as possible, constitutional norms embrace the tolerance and equality that Habermas sees as vital to ensuring national unity in the contemporary, globalized world. In contrast to constitutional patriotism, Habermas characterizes ethnonationalism as entailing a pathological and exclusive fusing of the national culture with mere majority culture. Consider the case of Germany, wherein a conception of German identity that relies on a certain ethnic, religious, or even linguistic affiliation would exclude significant portions of the populace. For Habermas, the immediate gains of the Schmittian exclusionary approach will in fact undermine national unity on the long run, due to the unstoppable process of global connections forging complex identities within societies whose homogenous histories are quickly becoming relics of the past. Habermas therefore arrives at a normative claim intended to provide a solution to the problem of achieving unity through identity in a contemporary liberal state: “the majority culture must detach itself from its fusion with the general political culture in which all citizens share equally; otherwise it dictates the parameters of political discourses from the outset” (Habermas, "The Postnational Constellation and the Future of Democracy," 146). Constitutional patriotism is realized in this very act of uncoupling majority culture from national culture, wherein the national culture transforms into the identification with the shared norms and inclusive equality of constitutional values. Only then can national unity be achieved without resorting to Schmittian ethnonationalism, which Habermas argues excludes vast communities within contemporary liberal democracies. Although Habermas himself acknowledges that constitutional patriotism is more abstract than the primitive power of Schmitt’s friend-enemy distinction, he embraces it as a normative necessity that citizens of liberal democracies should undertake, to ensure the stability and longevity of their nation’s political culture. By arriving at a moral injunction, Habermas fails to provide an adequate incentive for the majority to adopt constitutional patriotism; however, a Habermasian approach that more fully embraces the aforementioned fragmentary identity-forming processes solves this issue by pointing the way towards the dissolution of majority culture itself. The prospect of uncoupling national from majority culture is undeniably daunting, as the widespread introduction of constitutional patriotism as a national identity would involve the loss of significant privilege, status, and power for those who are current members of this majority culture. The roots of ethnonationalism continue to grip the political foundations of ostensibly liberal democratic societies, less because the public is convinced by the ideas of thinkers like Schmitt—although segments of these populations undoubtedly are, as the so called “alt-right” has recently demonstrated in the US—but rather because the majority gains an elevated status through exclusionary forms of national unity. The ethical cost of this exaltation of the majority culture on a national scale is the demeaning alienation of minority communities and, while Habermas is right to advocate for a more inclusive national identity that would remain faithful to liberal values, it seems unlikely that the majority would freely give up its status by adopting constitutional patriotism only to benefit the greater good. If one believes that people tend to act out of self-interest instead of morality, then the incentive to preserve the connection between majority and national culture itself must be nullified before constitutional patriotism can prevail. The tools for solving this problem are present in Habermas. To take Habermasian thought a step beyond Habermas himself, one can imagine what the process of complex identity fragmentation and formation would look like in the long term. In this scenario, the majority of people would no longer subscribe to a singular or even predominant identity. On the contrary, the very fragmentation that Habermas argues unsettles national unity would transform the populace of a liberal democracy into a vast network of many small communities, whose individual members would each belong to a great multitude of them. Such a nation would be so deeply fragmented that any given aspect of one’s identity would not provide a sufficiently large community to establish a majority. Instead, majority decisions would be made entirely by heterogeneous coalitions whose interest overlap for the time being, but who remain fragmentary constellations of various communities without a single or cohesive identity. Under such conditions of extreme fragmentation and individualization, Schmitt would argue that the nation itself has ceased to exist, even if its political institutions persist. From a Habermasian perspective, however, everyone would finally have an incentive to adopt constitutional patriotism, as the majority culture itself has dissolved. To some, this thought experiment may appear extreme, unfounded, or idealistic; but, by revealing a path to constitutional patriotism that does not rely on the mere moral goodness of an entire population, it offers a compelling reason to embrace the fragmentation that Habermas himself ambivalently describes. In doing so, the positive potential of fragmentation provides the possibility of a more hopeful future, in which liberal unity can be fully realized through the widespread adoption of identities as malleable, personal, and idiosyncratic as their individual subscribers. Thus, the future of liberal unity can only be attained through a confrontation and embrace of the very fragmentation that political theorists have feared for far too long. A Habermasian solution to the problem of national identity’s role in fostering political unity thereby completes the liberal project, developed by Rawls and Habermas, of formulating an adequate response and alternative to Schmitt’s critique of liberalism. As the nation-state continues to assert its relevance in the global consciousness of the 21st century, the naïve question to ask would be when the nation-state will fall into obsoleteness and thereby cease to exist. On the contrary, the deep political impulse in humanity and the social need for some form of unifying structure mean that the future of the liberal state will entail a transformation instead of an extinction. But the new political arrangement awaiting humanity at the end of this metamorphosis is yet undecided—making the path to be pursued all the more crucial. By recognizing that national unity as we know it will need to be radically reshaped and may even appear in the guise of what we now perceive as fragmentation, a new path toward this future emerges that rejects neither globalizing fragmentation nor the national community. Only through such affirmation can the enduring negativity of exclusion and perpetual violence someday be overcome. Endnotes 1 Readers may question the philosophical value of engaging with a theorist as reprehensible and repulsive as Carl Schmitt; however, I remain convinced that vigilant opponents of fascism must constantly challenge its foundations, not only to demonstrate the intellectual illegitimacy of totalitarianism, but also to better discern the fascistic modes of thought insidiously purveyed by alleged proponents of liberalis 2 This empirical claim is disputable, but simply assumed in this paper. I ask that skeptical readers grant it arguendo. References Böckenförde, Ernst-Wolfgang. “The Concept of the Political: A Key to Understanding Carl Schmitt's Constitutional Theory.” Law as Politics: Carl Schmitt's Critique of Liberalism. Ed. David Dyzenhaus. Durham: Duke UP, 1998. Print. Habermas, Jürgen. “On the Relation between the Nation, the Rule of Law and Democracy.” The Inclusion of the Other: Studies in Political Theory. Ed. Ciaran Cronin and Pablo De Greiff. Cambridge, MA: MIT, 1998. Print. Habermas, Jürgen. “The Postnational Constellation and the Future of Democracy.” The Postnational Constellation: Political Essays. Trans. Max Pensky. Cambridge, MA: MIT, 2001. Print. Müller, Jan-Werner. Constitutional Patriotism. Princeton, NJ: Princeton UP, 2007. Print. Rawls, John. Political Liberalism. New York: Columbia UP, 2005. Print. Rawls, John. A Theory of Justice. Cambridge, MA: Belknap of Harvard UP, 1971. Print. Schmitt, Carl. The Concept of the Political. Trans. George Schwab. Chicago: U of Chicago, 2007. Print. Schmitt, Carl. Constitutional Theory. Trans. Jeffrey Seitzer. Durham: Duke UP, 2008. Print. Schmitt, Carl. Political Theology: Four Chapters on the Concept of Sovereignty. Trans. George Schwab. Chicago: U of Chicago, 2005. Print.

The Duty to Use Drones The Duty to Use Drones In Cases of National Self-Defense Lina Dayem University of Chicago Author Ginevra Bulgari Vance Kelley Galen Hall Naima Okami Editors Spring 2019 Download full text PDF (14 pages) Introduction Since the tactic was first implemented, targeted killing by drones has been associated with political secrecy, dubious legality, and unsavory practices, and has thus garnered a negative reputation. In this essay, I endeavor to vindicate the use of drones, if only under the constrained circumstances of national self-defense. I argue the following: If a state can permissibly carry out targeted killings for the purpose of national self-defense, then it ought to do so with drones because of the minimized risks to soldiers and civilians. To argue this position, I first demonstrate that we should think of targeted killing as fitting into the self-defense paradigm, rather than military or law enforcement paradigms. I explain that states may permissibly engage in targeted killing when it is justified in terms of national self-defense. Next I explain how drones minimize risk to both soldiers and civilians. By combining the logic of self-defense with the principle of risk minimization, I arrive at the conclusion that in circumstances where targeted killing is necessary for national self-defense, states have a duty to use drones. Finally, I respond to potential objections about the use of drones, all of which can be addressed by improved drone policy. Military and Law Enforcement Paradigms Provide Inadequate Justification for Targeted Killing Targeted killing is a practice in which many governments engage. To justify targeted killings, theorists and politicians generally invoke one of two paradigms that permit the use of deadly force: the military paradigm and the law enforcement paradigm. These paradigms act to orient government policy—they direct how we may morally and legally behave towards our enemy. Targeted killing remains controversial because it cannot be clearly endorsed by either paradigm. The Military Paradigm The military paradigm activates the laws and conventions of war. Enemy combatants are the only parties liable to death. According to the jus in bello[1] convention, combatants can permissibly be killed during wartime without punishment (with some exceptions). Hostile treatment towards a combatant is permissible simply by virtue of combatant status, rather than any actions taken by the individual in question. In other words, a combatant’s liability to death derives precisely from assumption of the role of a soldier. In this paradigm, identifying an enemy terrorist as a combatant engaged in acts of war could enable the state to justify permissibly killing him without a trial. So, the fact that targeted killings of terrorists occur without trial suggests potential use of the logic of the military paradigm. Furthermore, in the case of the United States’ conflict with Al-Qaeda, we notice that the military paradigm seems to underlies the operative language of both parties, although it does not fully account for the conflict’s operative logic. Declaring a “War on Terror” and Jihad (Holy War)[2], respectively, implies at least nominally that each side considers the other’s fighters to be enemy combatants. The problem, of course, is that under international law a private citizen (such as Osama bin Laden) cannot declare war as that is a right granted only to sovereign states.[3] Conversely, under international law, a state cannot declare war against a non-state actor.[4] We may doubt the applicability of the military paradigm to targeted killings for several other reasons. First, terrorists willingly forgo the conventions that govern combatant status. The convention states that combatants wear the insignia of their country and carry their weapons openly.[5] Terrorists, however, do not wear uniforms, and hide amongst civilians. Of course, the main tactic of terrorists—targeting civilians—violates the jus in bello convention of noncombatant immunity. It is not only the status of the terrorists that is unclear; the status of those who carry out targeted killing is equally blurry, as civilian leaders often order targeted killings. In the United States, the Central Intelligence Agency (CIA), a civilian organization, has the authority to command drone strikes.[6] CIA control over drone strikes blurs the line between combatant and civilian, since civilians do actively engage in hostile conduct. This further complicates traditional boundaries of warfare with respect to justice and permissibility. Finally, naming someone in advance to be placed on a hit list runs counter to the very idea of status-based liability. In war, individual soldiers on the battlefield are not identified by the enemy and specifically targeted. Rather, a soldier is attacked by another soldier as part of a relationship of hostility qua soldier.[7] In other words, a soldier is liable to be killed due to his status as a soldier, rather than because of his actions. The practice of naming a target in advance singles him out qua individual. Therefore, the naming practice is fundamentally at odds with the status-based logic of legitimate military hostility. The Law Enforcement Paradigm Political theorists and governments have also justified targeted killing under a law enforcement paradigm. These parties maintain that terrorists should be considered criminals, rather than combatants. However, the goal of law enforcement is to arrest—not kill—the criminal. By the law enforcement paradigm, it is wrong to deprive a suspected criminal of due process by killing him before a trial. Indeed, the instances where law enforcement officers can permissibly kill are restricted to cases wherein a criminal resists arrest by putting the life of officers or others at risk. In this situation, liability to death is action-based rather than status-based. In other words, the criminal has effectively forfeited their right to life by initiating an attack. Liability to death may also come after the trial as retributive justice. So in certain cases, certain crimes may be punishable by death. While the death penalty is controversial, in cases where it is legal, it also represents an instance of action-based liability as punishment for a past action. However, by its very nature, targeted killing skips the fundamental steps of arrest and trial. Placing a name on a hit-list presumes guilt, and the individual listed becomes liable to instantaneous death by drone strike without being afforded due process. Under the law enforcement paradigm, this would be considered an extrajudicial execution, tantamount to murder.[8] Invoking the Principle of Self-Defense to Justify Targeted Killings The Self-Defense Paradigm In this discussion, I will draw from the work of several authors, such as McMahan, Gross, and Finkelstein, who analyze targeted killing as an act of self-defense. The self-defense paradigm better addresses the conceptual lacunae in the military and law enforcement paradigms as they concern targeted killing, and thus maps more clearly onto the practice of targeted killing. The basic premise of the self-defense paradigm is that when there is a threat to national security, a state has a right to protect itself. Self-defense can be considered a special offshoot of the law enforcement paradigm because, as described above, it is sometimes permissible for law enforcement officers to engage in certain self-defensive practices involving lethal force.[9] This paradigm deals with the threats that terrorists pose to national security and so is preemptive in nature. In this way, the killing of a terrorist should not be conceived of as punishment or retributive justice, since the paradigm does not deal with past actions. Instead, under the self-defense paradigm, someone who has never committed an attack could be just as liable as someone who has already committed several, provided that they pose the same current threat. Indeed, under this framework, a terrorist’s past crimes only serve as an epistemic gauge for predicting the likelihood that the individual will strike again.[10] The self-defense paradigm bypasses the military paradigm’s murky combatant-noncombatant distinctions because its liability criterion centers on action rather than status. If someone poses a threat to a state, the actions a state may take against the individual are not constrained by their status. Rather, the individual’s status is irrelevant both to their liability to death as well as our ability to retaliate. The self-defense paradigm also circumvents the law-enforcement paradigm’s crucial steps of arrest and trial because it operates on the logic of preemptive justice rather than retributive justice. Like the law enforcement paradigm, the self-defense paradigm uses the logic of action-based liability to death, but in a less evident manner. A terrorist’s liability to death derives from the notion that in planning an attack, a terrorist wrongs innocent people by increasing their likelihood of harm.[11] Thus, the harm caused by the terrorist’s death would need to be proportional to the harm prevented by protecting innocents from the attack. In other words, if their death would not disrupt realization of that harm, the targeted killing is not justified. Finally, it must also be considered whether or not the targeted killing could result in dangerous unintended consequences.When these criteria are met under the self-defense paradigm, the result would be that targeted killing is permissible as an act of self-defense. In the next sections, I argue that in the cases where targeted killing is permissible, states have a duty to use drones to carry them out because drones reduce risk to both civilians and soldiers. The Duty to Minimize Risk in Cases of Self-Defense: Individual Cases To demonstrate the duty to minimize risk to civilians and soldiers in cases of national self-defense, I will employ an analogy involving individual self-defense. Imagine that an individual is attacked in a way that threatens their life. It is uncontroversial that they have the right to defend themselves against the attack. By initiating the attack, the attacker has forfeited their right not to be harmed. Because the victim’s life is threatened, responding proportionally to the attack means that they may permissibly kill the attacker, if that is the only way to thwart the attack. However, imagine that the attack occurs in a crowded location. While the victim still has the right to defend themselves, they would wrong bystanders by inflicting harm on them, or risking their harm. The bystanders, detached from the conflict, have done nothing to make themselves liable to harm. Consequently, they must minimize the harm to which bystanders are exposed. Therefore, the means by which one may defend themselves in this crowded location are constrained. For instance, while the victim may shoot the attacker in the open, the victim many not shoot indiscriminately into the crowd in order to scare the attacker away. Similarly, if the attacker hides within the crowd, it would be wrong to simply aim at the group of people if there existed high likelihood that a bystander would be harmed. Furthermore, imagine the victim had the choice between two weapons that each afford equal capabilities to thwart or end the attack. One of the weapons is more precise than the other. For example, consider a handgun in comparison to a large vehicle (to be used as a deadly weapon). By aiming a gun at the attacker, they have a lower chance of accidentally hitting a bystander than if they were to drive the vehicle into the crowd. Because the victim has the choice between the two weapons, it would be wrong to choose the car, because it poses higher risk to bystanders. These two examples demonstrate that even in the presence of bystanders the victim retains the right to self-defense, yet has a duty to minimize the risk they pose to the innocent. For the bystanders simply have the misfortune of being in the wrong place at the wrong time, and have done nothing to make themselves liable to harm. The duty to minimize risk even when acting in self-defense is not only a consideration which must be undertaken with respect to bystanders, but at the state level also stretches to the defensive capabilities afforded by the state to its soldiers. Consider an analogy offered by Bradley Strawser. He imagines a commander who orders their troops to take off their bullet-proof vests and run at the enemy, and concludes that the commander wrongs the troops by ordering them into a dangerous situation without the normally available protection.[12] In doing so, the commander unjustly increases their risk to harm. While there may exist important moral differences between denying defensive capability to soldiers and aiming a weapon at a crowd of bystanders, Strawser’s analogy highlights the fundamental idea that it would be wrong to increase the possibility of harm to a soldier, or civilian, through deprival of defensive capability. Applying a Duty to Minimize Risk to Cases of Self-Defense: State-Level The duty to minimize harm to bystanders in the individual case can be extended to situations of state-level self-defense as a duty to minimize the risk of harm to civilians and soldiers. If under reliable intelligence a state discovers an imminent threat to its national security, the state has a right to defend itself against that threat. But at the same time, the means available to the state for the purpose of self-defense must be bound by a duty to minimize risk to civilians and to soldiers. If a state can justifiably respond to an imminent threat of a terrorist attack, it does not have a carte blanche to employ any weapon in its arsenal. For instance, a state could launch a nuclear bomb on the city where the attacker is hiding. While this would certainly be an effective method to kill the attacker, it is a grossly disproportionate and as such obviously unjust. Instead, the state might instead choose a “boots on the ground” mission to find the individual, or any number of other more precise strategies. Any kind of armed engagement involves risk to both civilians and to the soldiers involved. As in the case of individual self-defense, it is the state’s duty to employ a strategy that offers the least risk to all parties involved. I will now explain how drone technology seems to be the obvious choice for risk reduction in such a scenario. Risk Reduction Through Use of Drones Undertaking targeted killing with drones reduces the risk of harm to a state’s own soldiers, as well as foreign civilians, in several ways. For pilots, the remote operation of unmanned weapons dramatically reduces chance of harm: drone pilots can operate from a base thousands of miles away from the conflict zone. They personally face no threat of harm, retaliation, or retribution. In contrast, engaging in a “boots on the ground” mission puts the soldiers involved at an increased risk because they are directly exposed to the hazards of a hostile territory, which leaves them open to the possibility of attack. The remote aspect of drone strikes may also reduce harm to civilians in the conflict zone. Journalist Michael Lewis perceptively reasons that because drone pilots feel secure, they are surprisingly less likely to initiate a strike out of fear or anxiety for their personal safety.[13] What Lewis articulates is that the mistakes frequently made by soldiers in the “fog of war” can be minimized by drones.[14] Moreover, drones themselves can act as intelligence-gathering machines. A target may be surveyed for months before an attack is carried out. This has several benefits. First, it confirms that the target is actually involved in terrorist activities, reducing the chance of targeting an innocent person. If the suspect is the right person, then the extensive intelligence allows the pilot to identify a pattern in the subject’s daily life so that the subject may be targeted at times when they are more likely to be alone. Furthermore, when operated with due care, drones are precise, capable of striking only a single person. As journalist Mark Bowden notes, “[A drone’s] extraordinary precision makes it an advance in humanitarian warfare. In theory, when used with principled restraint, it is the perfect counterterrorism weapon. It targets indiscriminate killers with exquisite discrimination.”[15] To ensure that its deployment is as precise as possible, operators have adopted measures to minimize civilian risk. For example, a recent review of drone procedures by the International Security Assistance Force in Afghanistan recommended that strikes occur while the target is in a vehicle, rather than in a compound. This is because it is easier to keep track of those entering and exiting vehicles than those entering and exiting compounds, reducing the likelihood that a target’s family member or close associate will also be hit. In addition, the strike could take place on an isolated road, further reducing the risk to bystanders.[16] Even under unideal operation conditions, drone strikes are generally less deadly to civilians than other available means, such as ground strikes or piloted airstrikes.[17] Finally, the practice of targeted killings itself can reduce a conflict’s escalation and thus its casualties. Targeted killing, when justified as preemptive action as described above, functions to avoid prolonged engagement or full-scale war. Comparing the civilian casualties of war to drone strikes demonstrates clearly that conventional warfare is the deadlier of the two.[18] Thus, for the aforementioned reasons, when states can permissibly carry out targeted killing for the purpose of national self-defense, they have a duty to do so with drones because they minimize risk of harm for civilians and soldiers alike.This duty to employ drones should be understood as prima facie, a strategy that should be adopted unless specific circumstances require the use of other measures. In other words, the duty stands as long as using drone technology will minimize risk to bystanders and soldiers involved in the operation. If in a given operation, certain material limitations, geographical specificities, or procedural carelessness will cause an elevated risk of harm, the duty no longer stands. Objections Many critics object to drones on the grounds that civilians sometimes are killed in drone strikes—because of this unjust risk to civilians, they argue that the use of drones cannot be justified. I will first respond by emphasizing that my argument deals with minimizing risk, not eliminating risk altogether. To eliminate risk completely would be to advocate for pacifism. We need to compare the risk that drones pose to civilians to the risk that other weapons and armed operations pose to civilians. Recent figures indicate that in comparison to conventional measures, drone strikes have ranged from slightly to far less lethal in producing collateral damage.[19] The above objection can take on a more nuanced character, deserving a different response. Perhaps critics feel an intuitive discord between the very precise capability of the drone and the fact that it nevertheless produces civilian collateral, damage which seems to imply carelessness in drone operations. To respond to these critics, I argue that their concern has more to do with mishandling and reckless use of the technology than with a problem with the technology itself. This kind of criticism is not unique to drones; any weapon can be used well or poorly. However, I contend that because drones are known for their precision, concern over rates of collateral damage may be even more relevant than in the case of use of other weapons. As such, elevated numbers of civilian casualties may be an indication of faulty intelligence or careless policy. I reiterate that the duty to use drones is only prima facie: if drones cause or exacerbate harm—either as a result of material factors or policy faults—then the duty to use them is dissolved. Indeed, I would agree with critics that these cases call for rigorous reassessment of policy and procedure. However, I would highlight that by focusing on drone technology in discussing this problem we misplace responsibility by blaming the weapon for the faults of its operators. In his 2006 essay “Terrorism and Just War,” Michael Walzer advocates for targeted killing as a counterterrorism measure. He acknowledges that counterterrorism occurs in the grey area between war and law enforcement, and usually away from active war zones. In his view, to keep the effects of counterterrorism from resembling the effects of terrorism, it is the duty of counterterrorist fighters to take extensive measures to prevent civilian casualties. For it is the care and protection of civilians that distinguishes legitimate counterterrorist activities from the illegitimate engagement of terrorists, as terrorists do not operate with similar notions of “collateral damage.” Walzer believes this care for civilians should be upheld even more so in the case of targeted killings because they are activities outside of wartime. He concludes that “what justice demands is that the army take positive measures, accept risks to its own soldiers, in order to avoid harm to civilians.”[20] While I believe that the motivation for Walzer’s argument is noble, it rests on a false premise. For, when read carefully, we observe that Walzer takes risk as a sort of sliding scale oscillating between the two extremes of risk to soldiers or risk to civilians. Rather, it is possible to work to minimize risk for civilians without this occurring at the expense of soldiers, minimizing risks for both parties. Walzer does not seem to entertain this possibility. However, when used with due care, the drone is the most precise weapon that we have in our arsenal. Its use would minimize risk to civilians while simultaneously eliminating risks to soldiers as well. If this is truly the case, then there does not seem to be a reason that, by his criteria, Walzer would object to their use. It does not seem that acknowledging the duty to avoid harming civilians would necessarily preclude the duty to avoid harm to soldiers. Again, however, my argument for the use of drones is only a prima facie. If it is indeed the case that more civilians would be harmed by the use of drones, either due to material limitations or reckless policy, then they should not be used. Many critics argue that if drones make targeted killing easier and less risky to soldiers, states will undertake more targeted killings than they would otherwise. They worry that the easy, efficient, and asymmetric nature of drone engagement may cause operators to ignore or forget that killing is only permissible when absolutely necessary to prevent greater harm. In turn, criteria for appearing on a hit-list for such targeted killings could become weaker and weaker. Walzer expresses this concern in his essay “Targeted Killing and Drone Warfare.” He writes, “why should we think it different from the sniper’s rifle? The difference is that killing-by-drone is so much easier than other forms of targeted killing. The easiness should make us uneasy. This is a dangerously tempting technology. It makes our enemies more vulnerable than ever before, and we can get at them without any risk to our own soldiers” (italics added).[21] Therefore, he and likeminded observers assume that when there is lower risk to military personnel, the “necessity” threshold for pursuing a targeted killing would be lowered. My immediate response to such an objection is to specify that I do not argue for a blanket duty to use drones. My argument only pertains their use in justified instances of self-defense. Just because drones are tempting to overuse or abuse, it does not follow that they will definitely be misused. In a similar vein to my previous responses, I emphasize that the key is a consistent and honest drone policy, with transparency and accountability. If states consistently hold themselves to a high bar of certainty required to permissibly engage in a targeted killing, then temptation does not have to materialize into a dubious precedent. Similarly, some critics contend that the remote warfare aspect of drones will create a “video game mentality” in its operators, emboldening them to undertake even more risks. This notion, however, is simply untrue. According to a 2011 Department of Defense study, drone operators experience depression, anxiety, and PTSD at rates similar to combat pilots.[22] In the Atlantic article “The Killing Machines,” Mark Bowden, after conducting interviews with drone pilots, describes why these pilots experience such emotional distress. Combat pilots are not responsible for long-term intelligence collection, and are trained to leave the scene as soon as their missions are complete. On the other hand, a drone operator is responsible for collecting intelligence. This operator may observe the same person for months, becoming intimately familiar with the target’s daily life after seeing him with his friends and family. What’s more, the drone’s camera feed continues after a missile is launched. Drone pilots witness “the carnage close-up, in real time—the blood and severed body parts, the arrival of emergency responders, the anguish of friends and family…War by remote control turns out to be intimate and disturbing.”[23] One might also worry that justifying targeted killing with the logic of preemptive self-defense fails to address the combatant-noncombatant ambiguity previously discussed in reference to the military paradigm. For, if someone is killed before he commits a wrongful action, doesn’t that indicate that his killing could have only been status-based? I respond to this objection by reiterating that self-defense operates on the logic of action-based liability. While not immediately obvious, planning a deadly attack is a type of wrongful action severe enough to warrant liability to death, as it increases the likelihood of harm to a innocent people.[24] In this way, the assailant’s status is irrelevant; it is the nature of the threatening action that allows permissible retaliation. However, because of the preemptive nature of the response, there will always remain some uncertainty—indeed, the assailant could have had a change of heart and not followed through with the planned attack. Given this uncertainty, it is necessary to set the epistemic bar rather high when assessing the true likelihood that a suspected assailant will follow through with the threat. Indeed, extended surveillance should be used to ensure—to a degree of near certainty—that the targeted individual’s outward behaviors definitively imply intention to carry out an imminent attack. This would be possible with use of a drone, since it carries intelligence gathering capabilities. Ultimately, we should make quite certain that the assailant is truly preparing an attack for which killing them would be proportional to prevent the harm to innocents. In sum, my responses to these five objections follow a specific trend, emphasizing the need for stringent procedural constraints in use of drones, a high epistemic bar for identifying targets who pose a threat before proceeding to killing, and conducting the strikes with tremendous care for the welfare of civilians. I believe that if the policy for targeted killings was transparent, rigorously regulated, and strictly followed, the objections discussed above would be void. Conclusion In this essay, I have demonstrated that whenever targeted killing is permissible as an act of national self-defense, states have a duty to use drones to carry out the attack. In support of this argument, I have explained that the logic of self-defense is better applicable to targeted killings than either the logic of military conduct or of law enforcement. As the self-defense paradigm requires use of means which reduce risk to all parties involved, drones stand out as the obvious choice—precise, remote weapons which reduce the risk of harm to both soldiers and civilians. Finally, I responded to several objections to drone technology, ultimately concluding that strict and thoughtful procedures with regards to the technology’s use could allay critics’ overarching unease. Endnotes [1] Term of art meaning “just conduct during war.” [2] This is not to conflate the version of jihad that means “holy war” with its broader meaning: that is, a spiritual struggle within oneself against sin. [3] Jeff McMahan, “Targeted Killing: Murder, Combat or Law Enforcement?” in Targeted Killings: Law and Morality in an Asymmetrical World, eds. Claire Finkelstein, Jens David Ohlin, and Andrew Altman, (Oxford: Oxford University Press, 2012), 142. [4] McMahan, “Targeted Killing,”142. [5] This is a long-standing military convention, explicitly defined in by the United States’ “Military Commissions Act of 2006,” to respond to the lack of its explicit codification under the Geneva Convention. [6] Under the Obama administration, this power was transferred to the Pentagon, thereby placing drone strikes under military jurisdiction. However, this policy was reversed in March 2017 by the Trump administration, placing drone strikes in the jurisdiction of civilians again. See Mark Bowden, “Killing Machines,” The Atlantic, and “Trump Gives CIA Authority to Conduct Drone Strikes,” Reuters. [7] Thomas Nagel, “War and Massacre,” Philosophy & Public Affairs 15, no. 6 (July 1972): 123-44. [8] Michael L. Gross, “Assassination and Targeted Killing: Law Enforcement, Execution or Self-Defence?” Journal of Applied Philosophy 23, no. 3 (August 2006): 325. [9] McMahan, “Targeted Killing,”135; Claire Finkelstein, “Targeted Killing as Preemptive Action,” in Targeted Killings: Law and Morality in an Asymmetrical World, eds. Claire Finkelstein, Jens David Ohlin, and Andrew Altman, (Oxford: Oxford University Press, 2012), 179. [10] McMahan, “Targeted Killing,” 139. [11] McMahan, “Targeted Killing,” 139 [12] Bradley Jay Strawser, “Moral Predators: The Duty to Employ Uninhabited Aerial Vehicles,” Journal of Military Ethics 9, no. 4 (December 2010): 346-7. [13] Michael W. Lewis, “Drones: Actually the Most Humane Form of Warfare Ever,” The Atlantic, August 21, 2013, accessed November 20, 2018, https://www.theatlantic.com/international/archive/2013/08/drones-actuallythe-most-humane-form-of-warfare-ever/278746/. [14] Lewis, “Drones: Actually the Most Humane Form of Warfare Ever.” [15] Mark Bowden, “The Killing Machines,” The Atlantic, September 15, 2013, accessed November 20, 2018, https://www.theatlantic.com/magazine/archive/2013/09/the-killing-machines-how-to-think-aboutdrones/309434/. [16] Lewis, “Drones: Actually the Most Humane Form of Warfare Ever.” [17] Bowden, “Killing Machines.” [18] Daniel L. Byman, “Why Drones Work: The Case for Washington’s Weapon of Choice,” Brookings (blog), November 30, 2001, https://www.brookings.edu/articles/why-drones-work-the-case-for-washingtons-weapon-ofchoice. [19] Bowden, “Killing Machines,” The Atlantic. [20] Michael Walzer, “Terrorism and Just War,” Philosophia 34, no. 1 (2006): 9. [21] Michael Walzer, “Targeted Killing and Drone Warfare,” Dissent Magazine, January 11, 2013, accessed November 20, 2018, https://www.dissentmagazine.org/online_articles/targeted-killing-and-drone-warfare. [22] James Dao, “Drone Pilots Are Found to Get Stress Disorders Much as Those in Combat Do,” The New York Times, February 22, 2013, accessed November 20, 2018, https://www.nytimes.com/2013/02/23/us/drone-pilotsfound-to-get-stress-disorders-much-as-those-in-combat-do.html. [23] Bowden, “Killing Machines.” [24] McMahan, “Targeted Killing,” 139. References Bowden, Mark. "The Killing Machines." The Atlantic, September 15, 2013. Accessed November 20, 2018. https://www.theatlantic.com/magazine/archive/2013/09/the-killing-machines-how-to-think-about-drones/309434/ . Byman, Daniel L. “Why Drones Work: The Case for Washington’s Weapon of Choice.” Brookings (blog), November 30, 2001. https://www.brookings.edu/articles/why-drones-work-the-case-for-washingtons-weapon-of-choice/ . "Charter of the United Nations: Chapter VII." United Nations. Accessed November 20, 2018. http://www.un.org/en/sections/un-charter/chapter-vii/ . Dao, James. "Drone Pilots Are Found to Get Stress Disorders Much as Those in Combat Do." The New York Times, February 22, 2013. Accessed November 20, 2018. https://www.nytimes.com/2013/02/23/us/drone-pilots-found-to-get-stress-disorders-much-as-those-in-combat-do.html . Finkelstein, Claire. "Targeted Killing as Preemptive Action." In Targeted Killings: Law and Morality in an Asymmetrical World, edited by Claire Finkelstein, Jens David Ohlin, and Andrew Altman, 156-82. Oxford University Press, 2012. Gross, Michael L. “Assassination and Targeted Killing: Law Enforcement, Execution or Self-Defence?," Journal of Applied Philosophy 23, no. 3 (August 2006): 323-35. Lewis, Michael W. "Drones: Actually the Most Humane Form of Warfare Ever." The Atlantic, August 21, 2013. Accessed November 20, 2018. https://www.theatlantic.com/international/archive/2013/08/drones-actually-the-most-humane-form-of-warfare-ever/278746/ . McMahon, Jeff. “Targeted Killing: Murder, Combat or Law Enforcement?” In Targeted Killings: Law and Morality in an Asymmetrical World, edited by Claire Finkelstein, Jens David Ohlin, and Andrew Altman, 135-55. Oxford University Press, 2012. Nagel, Thomas. "War and Massacre." Philosophy and Public Affairs 15, no. 6 (July 1972): 123-44. Strawser, Bradley Jay. "Moral Predators: The Duty to Employ Uninhabited Aerial Vehicles." Journal of Military Ethics 9, no. 4 (December 2010): 342-68. Singh, Kanishka. "Trump Gives CIA Authority to Conduct Drone Strikes." Reuters, March 13, 2017. Accessed November 20, 2018. https://www.reuters.com/article/us-usa-trump-cia-drones-idUSKBN16K2SE . U.S. Congress, House. Military Commissions Act of 2006. HR - 6166, 109th Congr., 2nd sess. Introduced in Senate September 22, 2006. https://www.state.gov/documents/organization/150084.pdf . Walzer, Michael. "Targeted Killing and Drone Warfare." Dissent Magazine, January 11, 2013. Accessed November 20, 2018. https://www.dissentmagazine.org/online_articles/targeted-killing-and-drone-warfare . Walzer, Michael. "Terrorism and Just War." Philosophia 34, no. 1 (January 2006): 3-12.

No Place Like Home Home Bias Theory to Foreign Portfolio Investment in Emerging Markets Qiyuan Zheng Wesleyan University April 2021 Introduction: Modern technology has allowed investors, especially in developed markets, to gain access to a wealth of information about events that affect equity prices almost instantaneously, ultimately making it more difficult for investors in developed economies to ‘beat the market’. Such markets, where prices fully reflect all available information, are considered to be efficient; according to the efficient market hypothesis, opportunities for arbitrage in efficient markets are scarce, if not impossible. In this context, the typical investor could only generate higher returns by taking on greater risks. If this was the case, inefficient markets would be fundamentally more profitable for the informed investor as arbitrage opportunities are abundant and riskless profit can be made once the investor correctly identifies mispriced assets. This line of reasoning suggests that inefficiency in emerging markets might attract foreign portfolio investment (FPI) inflows, since investors in the developed world would seek to exploit the arbitrage opportunities in those inefficient markets. Market inefficiency in emerging economies is often at least partially due to poor property rights and weak institutional arrangements, such as unstable and corrupt political systems, not fully as a result of economic fundamentals, such as lack of financial development and domestic investor behavior. If inefficiency in an emerging market were to be largely a result of poor property rights and weak institutions, the ability of foreign investors to properly exploit arbitrage opportunities would be low and the institutional risk borne by investing in the market would be high, as unstable political environments foster volatile asset prices. Under such conditions, one might very well expect inefficient markets to drive away FPI. However, if the institutional quality of an investing environment is held constant and market inefficiencies are a result of economic fundamentals, then one should expect such a market to attract FPI. This paper finds evidence that, after accounting for a given level of institutional risk, potential simultaneity, and time of information absorption, there is no significant relationship between market inefficiency and FPI. To explain the inconsistency between theory and empirical evidence, I suggest an extension to the equity home bias theory. Since capital is abundant in wealthy nations where markets are efficient, investors that account for a majority of FPI inflows into emerging economies would be more familiar with and thus more optimistic about efficient markets since they more closely resemble their domestic investing environment. If a large enough number of foreign investors show a clear preference for efficient markets, the magnitude of their actions may very well offset that of unbiased investors looking to exploit arbitrage opportunities in inefficient markets. The paper proposes that, while market inefficiency should theoretically attract FPI, holding institutional risk constant, empirical evidence fails to show this relationship because foreign investors from the developed world exhibit a preference for more efficient markets that they are familiar with. A Survey of Theory and Existing Literature In documenting market efficiency among developing countries, Morck et al. found that the relationship between GDP per capita and price synchronicity can largely be explained by weak institutional arrangements and poor property rights. Their research not only provides a theoretical framework for this paper but also suggests an important measure of market inefficiency. Institutional shortcomings, especially poor property rights, discourages informed trading in the market as volatile political environments make it difficult for investors to price assets and retain their earnings (Morck 15, 16). The lack of informed investors would increase the magnitude of noise trading’s effect on the market. Since noise traders are uninformed and exhibit poor market timing (the buy high-sell low effect), their actions would not only lead to excess volatility in the market, but also push prices of different stocks to move synchronously away from their fundamental values (De Long 705, 715). Morck et al.’s paper presents empirical evidence supporting the above theory, as the observed relationship between GDP per capita and price synchronicity is rendered insignificant once property rights have been accounted for (Morck 22). This conclusion directly implies that, if protection of property rights is the only factor affecting the level of information reflected in prices, one can use price synchronicity as an appropriate proxy for market efficiency (i.e. better property rights lead to more informed traders, less price synchronicity, and a more efficient market). However, there are certainly other factors affecting the level of information reflected in stock prices. I argue that, in the absence of property rights violations, price synchronicity would remain an appropriate proxy as less synchronous prices would indicate that the market captures higher levels of firm-specific information and has a higher concentration of informed traders. Additionally, the lower prevalence and less developed nature of financial institutions in emerging markets would decrease the number of informed traders and thus increase price synchronicity while lowering market efficiency. In the subsequent analysis, I will refer to the following factors as economic fundamentals affecting market efficiency: domestic investor behavior, prevalence of financial institutions, quality of financial institutions, and technological development. This claim is particularly important, as the paper seeks to differentiate between market inefficiency caused by economic fundamentals and that caused by poor political institutions. Markets are efficient if “security prices at any time ‘fully reflect’ all available information” (Fama 383). Since efficient markets already reflect “all obviously publicly available information”, it would be very difficult for investors to obtain higher returns without undertaking greater risk (Fama 414). Rational investors who seek to increase returns while lowering risk would then be drawn to less efficient markets where arbitrage opportunities are more easily available. Thus, upon first glance, it seems that inefficient emerging markets would be more attractive to foreign investors, especially those from developed countries with efficient markets. Since most foreign portfolio investment comes from wealthier nations where capital is abundant, one could expect that less efficient markets, those with higher price synchronicity, would generate higher levels of FPI. However, this conjecture fails to consider the factors that lead to market inefficiency in developing countries and the preferences of foreign investors. The following paragraphs present two potential explanations for why emerging markets that are less efficient might fail to attract FPI. The first explanation comes directly from the work of Morck et al. on price synchronicity in emerging markets. While poor property rights decrease market efficiency, they also increase both the opportunity cost—the time spent gathering information to identify asset mispricing—and risk of arbitrage trading. Political events are also typically much harder to predict in these countries and, given the poor property rights, “risk arbitrageurs who do make correct predictions may not be allowed to keep their earnings, […] especially if the risk arbitrageurs are political outsiders” (Morck 15). Thus, if the observed market inefficiency is largely the result of poor property rights and weak institutional arrangements, the expected relationship between price synchronicity and FPI becomes more complicated. While inefficient markets still present certain arbitrage opportunities for investors, the risk of investing in an environment with poor property rights may very well drive foreign investors away. Another potential explanation comes from an extension of the equity home bias theory. The traditional equity home bias theory states that investors are more inclined to hold domestic stocks despite the potential benefits of international diversification. This phenomenon was first analyzed in 1991, when French and Poterba found that domestic investors expect returns around 300 basis points higher than foreign investors when looking at the identical market (French 4). The optimism in domestic markets would then lead investors to prefer a domestic stock over an international one, even if the economic values of the two stocks do not differ from each other. The equity home bias theory implies that investors prefer assets they feel more familiar with and such preferences can often offset the actual economic differences between any two assets. This paper argues that investors from developed countries with efficient markets would naturally prefer stocks in more efficient markets of the developing world as they more closely resemble their domestic investing environment. Since most FPI comes from wealthier nations in the developed world, even if one observes an inefficient market in a country with strong property rights and therefore higher chances of arbitrage without bearing institutional risk, such a market might not attract FPI as most foreign investors would prefer to hold assets in efficient markets with which they are more familiar. Existing literature shows that a simple analysis of FPI and price synchronicity is not enough to uncover the fundamental relationship between market efficiency and FPI inflows. To properly understand whether investors are truly drawn to inefficient markets due to opportunities of arbitrage, one must first take into account the institutional risk inherent in emerging markets. Only after accounting for the protection of property rights can one expect there to be a positive correlation between price synchronicity, essentially a measure of market efficiency, and FPI inflows. Empirical results that do not align with such expectations would be consistent with the story of equity home bias theory, where foreign investors prefer efficient markets as a result of familiarity and resemblance to their domestic markets. Constructing the Data Set The paper analyzes nine emerging markets: Brazil, Chile, China, Greece, India, Malaysia, Mexico, Thailand, and Turkey. The choice of these countries is based on their per capita GDP, the size of their domestic equity market, and data availability. The time period observed ranges roughly between 2000 and 2016. I shall note here that the somewhat arbitrary decision to characterize these countries as emerging markets through per capita GDP and choosing countries with sufficient stock listings may introduce sampling bias. A future extension of this paper may be to include a larger number of developing countries and test the robustness of this study by shifting the per capita GDP cutoff used to define emerging markets. Due to limited resources, this paper uses an approximation for its main variable of interest, price synchronicity. To obtain a price synchronicity index for each country and year, I collected weekly stock returns (between 2000 and 2016) for the companies listed on a popular index of the given country. Table 1 details the exact indexes used to construct the price synchronicity data. Given a country, the price synchronicity of year T is then constructed as follows: SyncT=w∈Tmax⁡(Upw, Downw)Upw+Downw1NT The above equation states that for every week w in year T, I calculated the number of stocks that rose in share price (if closing price was higher than opening price), the number of stocks that dropped in share price (if closing price was lower than opening price), and divided the maximum of the two numbers by the total number of stocks that experienced a change in share price. An arithmetic mean is then computed for the given NT weeks in year T. Note that this calculation is based on Morck et al.’s methods of finding price synchronicity, with the denominator constructed to include only stocks with changed share prices to avoid non-trading bias (Morck 5). Given the method of calculation, a price synchronicity of 0.5 would indicate that prices do not move together at all while high price synchronicity (such as 0.9) would indicate an inefficient market. Data for other variables were obtained through the World Bank, Transparency International, and World Integrated Trade Solutions (WITS). The following section will discuss the methodologies and rationale for including each regressor. Analytical Methodology Given the panel structure of the data, the paper will use a fixed effects model on the country level with robust standard errors to analyze the relationship between market efficiency and foreign portfolio investment. The fixed effects model would allow for the paper to account for unobserved but time-constant differences between countries, therefore yielding a less biased estimate. The fixed effects model was chosen over a random effects model on empirical grounds. The Sargan-difference test of overidentifying restrictions yielded a Sargan-Hansen statistic of 566.9 when applied to a random effects regression with robust standard errors, which indicates a significant level of overidentification in the model. Initially, I estimated a simple fixed effects model with price synchronicity as the only explanatory variable: FPIit=α+βSyncit+i+eit (1) However, the coefficient for the model is difficult to interpret and meaningless to this paper’s purpose. While the paper is primarily interested in exploring the effect of market inefficiency (caused by non-institutional factors) on FPI inflows to emerging markets, the coefficient presented in Equation 1 is theoretically biased downwards as the result of institutional risks present in emerging markets with high price synchronicity. More specifically, one can see that is subject to omitted variable bias because the level of corruption drives up price synchronicity (positive correlation) and discourages foreign investors (negative correlation with FPI). Additionally, could be affected by other confounding variables as a result of selection bias. To properly identify how FPI is affected by market inefficiency caused by economic fundamentals, one must account for the level of political risk the investor must bear to participate in the market and other confounding variables with the following fixed effects model: FPIit=α+1Syncit+2Corruptionit+3Xit+i+eit (2) Note that Corruptionit reflects the Corruption Perception Index of country i in year t, obtained from Transparency International. The author calculated Corruptionit=(100- Corruption Perception Index) so that 0 represents no corruption and 100 is the value for the most corrupt extreme. Ideally, the paper would’ve liked to use the “good government” index from Morck et al.’s work that included factors specific to property rights protection but financial constraints limited the data collection process (Morck 15). Xit is a vector of time-varying country-level characteristics that consists of the following variables: GDP per capita, inflation volatility, market capitalization of domestic companies (in current US dollars), and capital openness. Inflation volatility is calculated by taking the 5-year moving coefficient of variance of each country’s consumer price index (obtained from the World Bank). Capital openness is measured by the standardized version of the Chinn-Ito Index (Chinn). GDP per capita and inflation volatility could both be omitted variables as they both are significant indicators of an economy’s stability and development, in turn affecting confidence levels in foreign investors. Market capitalization indicates both the breadth and depth of the domestic financial markets, as a higher levels of market capitalization would provide more opportunities for foreign investors and increase FPI inflows. Although intuition suggests that capital openness would be a significant factor in affecting foreign investment, empirical evidence from existing literature suggests that capital controls on FDI and FPI have no significant impact on FPI inflows (Li 228, 230). The variable was still included in Equation 2 largely because theory implies that capital controls would increase the opportunity cost for foreign investors to invest in the domestic market and therefore decrease FPI. To test for robustness of the results, I removed the variable from the model and found no significant changes to the parameters of interest. Pre-existing theory and literature suggested that each of the variables included in the vector Xit would be correlated with FPI inflows. Thus, the model should include these variables as controls in the regression to minimize standard errors and account for any sampling bias. To account for potential information absorption time, I re-estimated Equation 1 and 2 with lagged price synchronicity, inflation volatility, and GDP per capita. If these factors were to exhibit greater cross-year variations than within-year shifts, then the incorporation of the lagged independent variables would allow for the possibility of foreign investors “reacting” to changes in their values in the next time period. I chose to not pursue a fully lagged model because market capitalization and capital controls are present constraints on the foreign investor’s choice set. Further, the corruption index remained period t as well since it measures the level of corruption perceived by the public at time t, which is a direct factor in determining the level of FPI in the same time period. Additionally, a fixed effects lagged-distributed model was also estimated as follows: FPIit=α+1Syncit+2Syncit-1+3Corruptit+5Xit+6Yit-1+νi+eit (3) Note that Syncit-1 and Yit-1 are lagged price synchronicity and lagged vector of control variables, hence they are values of country i in year t-1. The paper conducted further robustness tests by removing 2008 from the estimated models. Figure 1 shows that FPI inflows in observed countries dropped dramatically as a result of the Global Financial Crisis (GFC). Figure 2 shows the average price synchronicity among the observed countries across time and indicates that average price synchronicity varies between 75% and 70% for most of the years with no significant change during the GFC. One can see that the patterns exhibited by the data during the GFC is an aberration caused by an external shock, which could affect both the precision and accuracy of previous estimations. The paper accounts for this by re-estimating all the previous models with a smaller sample size that does not include 2008. Although doing so limits the power of the test, the removal of the outlier (2008) should offer a more accurate estimate of the effect market efficiency has on FPI. Empirical Results Before estimating the models specified in the Methodology section, one must return to examine an earlier claim: “price synchronicity would remain an appropriate proxy under [scenarios in which other factors (besides poor property rights) affect the level of information reflected in stock prices] as well, since less synchronous prices would indicate that the market captures higher levels of firm-specific information”. Table 2 Column 1 shows an estimated fixed effects model that captures the relationship between price synchronicity and institutional risk (represented by the Corruption Perception Index). As expected, the coefficient for the Corruption Index is positive, since higher levels of corruption means more institutional risk and thus higher price synchronicity. The estimated coefficient is statistically significant. Most notably, the R-squared for the estimation is only around 8%, indicating that there are certainly other factors, such as market inefficiency due to economic fundamentals and the quality of financial institutions, that affect price synchronicity. Additionally, Table 2 Column 2 shows a negative correlation between corruption and FPI inflows, as expected. Although the relationship is not statistically significant, theory suggests that it would bias the estimates of Equation 2 downwards. Tables 3, 4, and 5 show the estimated regressions specified in the Methodology section. Table 3 displays the estimates obtained by using the “present” model without any lagged variables while Table 4 shows the results after lagging the appropriate independent variables. Table 5 shows the estimates obtained from the lag distributed model (Equation 3). In Table 3, the first two columns represent Equation 1 and 2 without the lagged independent variables. The first column shows a negative and marginally significant (at the 10% threshold, p=0.054) coefficient for price synchronicity, with the point estimate show approximately $0.605 billion decrease with every 1 percentage point increase of price synchronicity. This is not surprising, as price synchronicity caused by institutional risk would most likely drive foreign investors away. The second column on Table 3 also show a negative and marginally significant coefficient for price synchronicity. Although this coefficient is greater in magnitude ($0.967 billion decrease for every 1 percentage point increase in price synchronicity), it has a larger confidence interval than that of the first model and is less statistically significant (p=0.066). Columns 3 and 4, estimates after removing 2008, exhibits a similar pattern as the coefficient for price synchronicity is negative and statistically significant (at the 5% threshold) when it’s the only regressor in the model but no longer significant once the model accounts for institutional risks and other sources of selection bias (Column 4, Table 3). Table 4 incorporates lagged price synchronicity, inflation volatility, and GDP per capita. Columns 1 and 2 show the results of Equation 1 and 2 when with the lagged independent variables replacing their non-lagged counterparts. Columns 3 and 4 show those same models estimated after removing 2008 from the sample. The results across all columns are consistent in that the coefficient for lagged price synchronicity are all positive but statistically insignificant even after accounting for the downward bias caused by institutional risks. Interpreting the results of Table 3, the paper finds that market inefficiency (proxied by price synchronicity) drives foreign investors away mostly as a result of the poor property rights that created the inefficient market in the first place. This effect is exhibited by the negative and (marginally) significant coefficient for price synchronicity in Column 1 and 3. Once the model accounts for institutional risk and potential selection bias, market inefficiency remains negatively correlated with FPI inflows but at a less significant level in Column 2 and completely insignificant when 2008 is removed from the sample, as shown in Column 4. If the level of institutional risk does not change and the market becomes more inefficient (price synchronicity rises), theory suggests that more investors would be drawn to the market as they seek to exploit arbitrage opportunities. This theory implies that a model which accounts for institutional risk should generate a positive and significant coefficient for price synchronicity. However, empirical evidence does not support this conjecture and instead illustrates that market inefficiency stemming from causes unrelated to institutional risks either does not significantly affect or decreases the level of FPI inflows, depending on whether year 2008 was included in the sample. Results obtained by the lagged models fit the theory slightly better, as the coefficient for lagged price synchronicity is positive, as shown in Table 4. Both Column 2 and 4 of Table 4 exhibit point estimates that indicate a $0.42 billion rise in FPI inflows per percentage point increase in lagged price synchronicity (decrease in market efficiency). However, this estimate is not statistically significant, which could be a result of the small sample size and thus less power / minimal detectable effect. Further, Column 2 and 4 of Table 4 showed a higher point estimate than Column 1 and 3 of the same table, respectively, fitting the theory that not including corruption as a covariate would downwardly bias our estimate. Considering the empirical results on both tables (with and without the lagged component), one can see that, once institutional risks are accounted for, changes in market efficiency does not significantly affect FPI inflows. A potential explanation for this phenomenon is an extension of the equity home bias theory, in which foreign investors from the developed world feel more familiar and are thus more optimistic about efficient markets. Hence, market inefficiency (under the same level of institutional risk) can both attract investors through opportunities of arbitrage and drive away investors through its unfamiliar nature. If those effects offset each other, one would observe no significant relationship between market inefficiency and FPI inflows after accounting for institutional risk. That said, it is more probable that Table 4 is the better model, as it lagged certain independent variables that investors would be “reacting” to in period t based on their information in period t-1. To further test this, a lag distributed model was estimated in Table 5 to show that price synchronicity in period t-1 is indeed positively correlated with FPI inflows in period t, even after account for price synchronicity in period t. However, as before, the estimate is not statistically significant, most likely due to a combination of small sample size and the potentially offsetting effect from the equity home bias theory. Robustness Tests Another potential explanation for the insignificant coefficient for price synchronicity is a reverse causality chain between FPI inflows and market efficiency. The paper argues that increased FPI inflows can lead to higher market efficiency in emerging economies. As established, a majority of FPI in emerging markets come from developed countries where capital is abundant. These developed countries also have better financial institutions, which help “foreign” investors make more informed decisions than their domestic counterparts in the developing country. If one assumes that most foreign investors in emerging markets are more informed than their domestic counterparts, then an increase in FPI inflow would mean more informed investors in the market and therefore an increase in market efficiency. Incorporating this conjecture, one can obtain three distinct factors that affect market efficiency in emerging economies: level of institutional risk, amount of foreign investment (FPI inflows), and other economic fundamentals. Since the paper is only interested in the relationship between market inefficiency caused by economic fundamentals and FPI inflows, it must account for the first two factors. Equation 2 properly accounts for the level of institutional risk but fails to address the joint relationship between market efficiency and FPI inflows. I used a three-stage least squares method to estimate the following simultaneous equations system: FPI=γ+1Sync+2X+3GDP+e2 (4) Sync=α+1FPI+2Corruption+3(HH Index)+4GDP+e1 (5) The variable HH Index, the Hirschman Herfindahl Index for exported products (obtained from WITS), was added to account for the level of economic specialization, since more specialized economies tend to experience greater price synchronicity (Morck 9). Additionally, the fixed-effects approach was replaced with a least-squares dummy variable approach by adding a dummy variable for every panel value except one. The results of this model are shown in Table 6, with the coefficients for the panel dummy variables suppressed from the output. The first two columns show the estimates for both endogenous variables (Equation 4 and 5) when using the entire sample size and the second set of columns shows the results after removing 2008 from the sample. Even after addressing the simultaneity problem in the non-lagged model, the paper fails to find a significant relationship between market efficiency and FPI. Although the coefficients for price synchronicity are positive, as shown by Column 1 and 3 in Table 6, they are statistically insignificant. Additionally, these estimates fail to provide empirical evidence in favor of the claim that FPI leads to more efficient markets in developing countries; both Column 2 and 4 show insignificant positive coefficients for FPI when it’s used as an independent variable in estimating price synchronicity. As stated previously, theory and empirical evidence (from Table 4) suggest that a model with lagged price synchronicity and corruption index would better capture the causal relationship between market efficiency and FPI. If the lagged model is a better fit and the conjecture of reverse causality remains valid, then changes in FPI inflows in time period t-1 would affect market efficiency of time period t-1, which in turn would influence the FPI inflows of time period t. To put it simply, FPI and market efficiency are two endogenous variables that are both sequentially and jointly determined. A precise and accurate estimate of the effect market inefficiency (when caused by economic fundamentals) has on FPI inflows would then require a model that allows for both sequential and simultaneous relationship between market efficiency and FPI. I estimated such relationship with the following equation: FPIit=α+1Syncit-1+2Corruptit+3Xit+4Yit-1+5FPIit-1+νi+eit (6) where FPIit-1 is the lagged FPI variable. This equation would allow us to “parse out” the reverse causality effects on market efficiency caused by changes in FPI inflows. Thus, 1 would be the unbiased estimate if such reverse causality indeed exists. Results in Table 7 show a point estimate of between $0.14 to $0.28 billions of FPI increase per percentage point increase in the lagged price synchronicity (depending on whether or not 2008 is included in the sample). However, this estimate is also not statistically significant, most likely due to the same reasons addressed earlier in the previous section. Conclusion and Avenues for Future Research: Due to the lack of available data and time constraints, there are a number of robustness tests and models I wished to estimate but was unable to do so. As mentioned earlier, the paper used an approximation for price synchronicity. Although the approximated values fall somewhat around those provided by Morck et al.’s research (provided on Table 2 of Morck’s article, for year 1995), using the actual price synchronicity of all stocks, as opposed to that of index stocks, in each given country and year would reduce sampling bias in the estimated models. I also wished to estimate the same fixed effects models but replace the Corruption Perception Index with the “good government” index constructed by Morck et al. that more closely represents the institutional risks foreign investors face in emerging markets. Ultimately, using a fixed effects model and a three-stage least squares estimation of a simultaneous equations system, this paper finds evidence consistent with an extension of the equity home bias theory. Economic theory suggests that, under the same level of institutional risks, inefficient markets should attract foreign investors and therefore increase the level of FPI inflows into an emerging market. Empirical evidence shows that there is no statistically significant relationship between market efficiency and FPI inflows once the protection of property rights has been accounted for. At “best”, empirical evidence suggests a $0.42 billion rise in FPI per percentage point increase in lagged price synchronicity, but the point estimate is statistically insignificant. This paper proposes that one can reconcile the inconsistency between theory and empirical evidence by looking at an extension of the home bias theory, where some foreign investors prefer efficient markets because they more closely represent their domestic investing environment. References Chinn, Menzie D. and Hiro Ito (2006). "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Journal of Development Economics, vol. 81, no. 1, pp. 163-192. De Long, J. Bradford, et al. “Noise Trader Risk in Financial Markets.” Journal of Political Economy, vol. 98, no. 4, 1990, pp. 703–738. Fama, Eugene F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance, vol. 25, no. 2, 1970, pp. 383–417. French, Kenneth R., and James M. Poterba. “Investor Diversification and International Equity Markets.” The American Economic Review, vol. 81, no. 2, 1991, pp. 222–226. Li, Jie, and Rajan, Ramkishen S., “Do capital controls make gross equity flows to emerging markets less volatile?” Journal of International Money and Finance, vol. 59, pp 220-244 Morck, Randall K. and Yu, Wayne and Yeung, Bernard Yin, "The Information Content of Stock Markets: Why Do Emerging Markets Have Synchronous Stock Price Movements?" Journal of Financial Economics (JFE), vol. 58, no. 1-2, 2000 Wooldridge, Jeffrey M., 1960-. Introductory Econometrics : a Modern Approach. Mason, Ohio :South-Western Cengage Learning, 2012. Print.

Not Paying Income Tax Timely Leads to Significant Financial Losses for the governments. What Design Changes Could Be Made to Tax Collection Policy to Minimize These Delays? Aryan Midha Author Maxwell Robinson Vittorio Nazzi Matthew Wong Editors Abstract Behavioral economics challenges the notion that humans are always rational and capable of making good decisions. Humans often rely on various heuristics under uncertainty making them irrational at times. Heuristics is a mental shortcut or rule of thumb that simplifies decision-making and problem-solving. In this paper, we discuss the use of behavioral economics in improving tax policies by considering the status-quo bias, framing, and conformity heuristics. Status-quo bias causes taxpayers to stick to their default condition (i.e tax non-payment.) Framing refers to the formulation of the problem and how the information is presented to the decision maker. Further, conformity encourages taxpayers to pay their taxes by appealing to personal and social norms. Using these heuristics, I will explore how tax collection policies can be refined to minimize financial losses for the government. I. Introduction Einstein said, “The hardest thing in the world to understand is the income tax, ” which remains relevant today as tax computation and the payment process remain complicated. This leads to procrastination and non-payment, creating detrimental financial losses for the government. For example, In the US, between 2014 to 2016, the tax gap, the difference between true tax liability and amount paid on time, was $496 billion (IRS, 2022). The tax liability increased by more than 23% between the two periods, 2011-2013 and 2014-2016 indicating a need to change the tax policy. Studies show that tax policies that implement behavioral economics are more impactful and efficient compared to traditional tax policies (World Bank Group, 2018; Behavioral Insights Team, 2012; OECD, 2021). Behavioral economics assumes that humans have limited capability to compute large amounts of data at once. The World Bank splits the tax-paying process into four stages: understanding, deciding, declaring, and paying (World Bank Group, 2008). Behavioral policies can improve compliance at each stage by addressing systematic errors which are “cognitive biases or heuristics that consumers use to make pragmatic choices that are not rational or optimal ”(Kahneman, 2011). This paper will explore three main biases, namely Framing, Status quo, and Conformity, and take them into account to create a viable tax policy that targets the four stages mentioned above. Every year, more than 170 million taxpayers have to file taxes in the US. With the tax code becoming increasingly complex, taxpayers have to spend a significant amount of time filling out the 1040 form, various schedules and keeping records of their transactions. This leads to some individuals failing to pay taxes in a timely manner or take up benefits such as the Earned Income Tax Credit (EITC). II. Framing Kahneman and Tversky define framing as the formulation of the problem and how the information is presented to the decision maker (Kahneman and Tversky, 1981). This shows how information is presented impacts the decision-making process. Framing is indeed a bias, as it leads to decision-makers making different choices with identical information. Their choices are not uniform. Governments can use this to their advantage by presenting income tax letters in a way that encourages taxpayers to pay their accurate tax amount on time hence improving compliance. A study by Jones (2017) further found that at least 30% of the extra revenue accrued to the government from overwithholding arises from loss-averse behavioral response. He claims it is possible to manipulate a taxpayer’s perception of what constitutes a gain or a loss—potentially through relatively cheap manipulations to phrasing or presentation. Loss framing could be induced to increase the take-up rate of a specific tax-based incentive in targeted populations. Gain framing could be induced to reduce evasion motives among traditionally non-compliant groups, potentially in a cost-effective manner when compared to audits. Hard Tone vs Soft Tone A study in Poland (World Bank Group, 2018) showed the effect of using a hard tone versus a soft tone on tax compliance. To do so, they created two types of letters: public good positive and public good negative , where both letters informed the taxpayer how the tax revenue would be used to provide public goods such as preschools, schools, roads, and safety. The public good positive treatment creates a perception of the taxpayer as a responsible member of their community who is helping provide public goods by paying their taxes. This appeals to the taxpayer on a very personal level making them aware of the public benefitting infrastructure provided by the government, which encourages them to pay on time. The public good negative treatment frames non-payment as an implicit threat where all the municipal benefits currently enjoyed would be lost without sufficient tax revenue. It uses the principle of loss aversion to motivate taxpayers to pay. The reaction of the taxpayer, as a result, will be to pay taxes to avoid losses. Loss aversion is defined as: “changes that make things worse (losses) loom larger than improvements or gains ” (Kahneman, Knetsch, and Thaler, 1991). The key contrast between both approaches is the “inability of the government to continue providing ” vis-à-vis “potential losses suffered by the individual in the future ”. These treatments are considered soft tones as they do not mention any form of punishment for non-payment. To create a comparison, “hard tone” was also used to clearly understand what encourages taxpayers the most to pay taxes on time. The World Bank used four different hard tone samples, including: deterrence, deterrence with an execution order attached, omission, and omission combined with deterrence together. These treatments explored the different effects of using a harsher tone. In the deterrence treatment, actions such as blocking bank accounts and salaries could be implemented as a punishment. Furthermore, payment of any execution expenses that arise must be covered by the non-complier. The deterrence with execution order treatment had the same contents as the deterrence letter however a sample execution order form was attracted to the letter. This evokes guilt and fear of the possible consequences of delayed payments. Taxpayers are illuminated to the harshness of the consequences. In an omission model the government chooses to see the non-payment of taxes as accidental and gives the benefit of the doubt to the defaulter. This method of framing is used to overcome status-quo bias, which will be explored in detail later in this paper. The effectiveness of the hard and soft-tone letters was compared in three parts: payment rate, payment amount, and outstanding tax liability. The payment rate is the percentage of the tax-paying population that pays their tax on time. The control group received an official enforcement letter called a dunning letter. Of this group, 40.2% made on-time tax payments. On average, the soft-tone letter increased payment rate to 43.8% while the hard-tone letter raised payments to 46.9% with p=0.01. This suggests that proper framing can increase payment rates and that overall hard tone is the most effective choice. Additionally, the use of hard-tone and soft-tone letters increased the payment amount received per letter sent. In the control group, taxpayers paid on average 1,122.7 PLN (Polish Zloty), the soft-tone letters yielded 1278.0 PLN ($341 USD), while the hard-tone letters yielded 1368.3 PLN ($365 USD). The increase in payment received is significant as the total revenue collected increases greatly with the average payment. Lastly, the use of different tones reduced the overall tax liability. The dunning letter group had an average of 6.26% in tax liability, while behavioral letters had a tax liability of 6.17% for soft-tone and 6.10% for hard-tone letters. This shows that more people were filing their taxes and the number of short fillers was reduced giving the government valuable insight on the methods to use to increase tax compliance. Lastly, this study delved deeper into how different taxpayers react to give a more insightful result. Letters reveal that taxpayers in their mid-40s are most responsive, with responsiveness decreasing afterwards. The hard-tone messages (omission commission + deterrence) perform best among those in their 50s, while softer messages reduce compliance, especially among older taxpayers. Younger taxpayers (20–29) respond positively to soft, public good messages, but these same messages have a negative impact on those aged 50–64, likely because older taxpayers don't benefit directly from services like schools. The 5.2pp difference in response is statistically significant. Customizing messages by emphasizing relevant public goods for each age group could improve tax compliance. Both men and women’s highest paying rate from all the treatments was in the hard-tone treatment showing both genders respond more to the hard-tone letters. However, a difference emerges between parents and non-parent taxpayers. Parents were not very responsive to any of the treatments and the behavioral letter was the most effective. Conversely, all the hard-tone letters performed better than soft-tone and the behavioral letters showing hard-tone messages work on non- parents, but not on parents. Given these differences in effects across groups, a targeting system could be used to send out appropriate toned messages to increase tax compliance. These studies concluded that hard-tone letters were the most effective in increasing tax compliance payments over outstanding debts. This does not negate that using soft-tone letters was also beneficial. The efficacy of these different tones depends on the individual characteristics of the taxpayer, such as age, gender, and parental status. Complexities Another major reason for tax noncompliance is the excessive use of legal jargon that impedes taxpayers’ understanding and ability to pay (Alm 2012, p.53). Fatigue and lethargy often influence an individual’s decision when a choice depends on a large amount of data as they are often unwilling to spend too much time or energy on that decision. Blumenthal and Slemrod (1992) found that, on average, taxpayers spent 27 hours recording and reporting their taxable activities. This leads people to employ heuristics such as intuition in decision-making. Thaler and Sunstein (2008) found that humans have two systems for making decisions: an "automatic system" that quickly finds a solution and a "reflective system" that logically reasons out the problem. The use of intuition falls in the realm of “automatic systems.” Most of the time, the “automatic system” comes up with the same solutions as the reflective system, which uses logic, but sometimes it does not due to the usage of heuristics. As mentioned earlier, the tax payment process has four steps: understanding, decision to pay, declaration, and payment. Complexities can be present in the “understanding” or “declaration” phase. Taxpayers have to individually compute the total value of taxes, a process which may be tedious due to inexperience or a lack of clarity regarding current tax laws. Additional problems arise during payment. Technology is constantly improving, thus, paying taxes has become much more simple. At times, too many options and related guidelines confuse and frustrate the taxpayer, causing them to abandon the process midway. Lastly, the complexity of the system makes the taxes seem unfair due to the lack of transparency in the income tax process which makes the taxpayer reluctant to pay their taxes on time or in full. Economic models have customarily recognized three costs which might deter the take-up of tax benefits which are: the transaction costs of applying for a benefit, the costs of learning about eligibility and application rules, and lastly, the stigma associated with enrollment (Currie 2006). These concerns could be a consequence of confusion regarding program eligibility or incentives (e.g., Liebman and Zeckhauser 2004), inattention (e.g., Karlan et al. 2015), or psychological aversion to program complexity or the small “hassles” often involved in claiming (e.g., Bertrand, Mullainathan, and Shafir 2006). This reflects a failure of policy to deliver benefits to those who most need them. As a case study, the United Kingdom released simplified letters to test whether they would increase tax compliance among dentists and doctors (Behavioural Insights Team, 2012). The simplified letters contained three short and easy-to-read sentences, outlining the actions and procedures required for compliance. This treatment saw a 15-30% higher response rate than other types of messaging, which shows that even highly skilled and well-educated people can be influenced to pay their taxes on time by simplifying the process. Furthermore, in Belgium, different methods were tested to overcome complexities in tax payment (Spinnewijn, Tsankova, and Luts, 2019). They simplified the tax letter by shortening the length of words, reducing the information overload, and highlighting the action-relevant information. This led to an increase in compliance by 10 percentage points (pp)(23% of the control mean). Moreover, late payers from the previous year were 2.6 pp more likely to file their taxes on time. Complexities affect individuals in developed countries and underdeveloped countries similarly. Taxpayers in low and middle-income countries are also particularly adversely affected, due to lower literacy rates and a lack of trained accountants. This causes difficulty in accurately maintaining records, filing returns, and comprehending tax laws, resulting in partial filing, late filing or non-filing making them partial or non-compliant. This backs the findings of Gangl (Gangl et al., 2015b) where perceived fairness and legitimacy lead to deliberate trust in the tax authorities. By removing these complexities, taxpayers can understand how much they are paying and how it is calculated, building trust and improving compliance. Complexities can lead to notable inefficiencies in government-run programs such as the Earned Income Tax Credit (EITC). Simplifying the tax system and reducing compliance burdens could increase benefit take-up, reduce forgone benefits, and enhance revenue collection. The EITC, initially designed as an incentive for low-income individuals to work, demonstrates the barriers taxpayers face in claiming available benefits. Studies estimate a program take-up rate of 75% (Plueger 2009). A substantial portion of non-participation stems from informational barriers, with 16% of eligible individuals not filing taxes and 9% failing to claim the credit despite filing. This highlights the need for clarity in tax communication and simplification of claim procedures. Experimental evidence further underscores the sensitivity of benefit take-up to reduced informational complexity. Simplified notices, shorter worksheets, and enhanced salience of benefits through targeted messaging have demonstrably increased EITC claims, with a field study resulting in $4 million in claimed benefits out of $26 million identified as unclaimed (Manoli, 2015). Moreover, over-withholding demonstrates how simplifying processes can benefit both taxpayers and the government. Employers withholding excess taxes reduces taxpayers' need for year-end adjustments, leveraging loss-averse behavior to generate 42% more revenue than expected from interest costs alone. Simplification strategies can similarly mitigate tax manipulation, increase voluntary compliance, and maximize revenue efficiency. Governments can reduce complexities in tax policy to increase the legitimacy and perceived fairness of tax administration. Simpler tax systems will increase compliance and reduce the opportunity for tax evasion and avoidance by making the steps of paying taxes easier and reducing the mental computation required of taxpayers. III. Conformity Conformity refers to individuals changing their beliefs, attitudes, behaviors, or perceptions to complement the beliefs of a group to which they want to belong, and so they yield to group pressures (Crutchfield, 1955). Herbert C Kelman, an American psychologist, analyzed this behavior and distinguished three different forms of conformity: compliance, internalization, and identification (Kelman, 1958). For this paper, compliance and internalization are relevant. Compliance refers to “when an individual accepts influence [...] to gain specific rewards or approval and avoid specific punishment (Kelman, 1958, p. 53). This is a heuristic as many people become irrational and fall in without considering the benefits and drawbacks of their decision. According to an analysis (Zafar, 2011) people conform to groups because they are uncertain about their beliefs and believe that the group is more likely to be correct, a pattern denoted descriptive conformity . The second category is internalization which happens “when an individual accepts influence because the content of the induced behavior - the ideas and actions of which it is composed - is intrinsically rewarding. They adopt the induced behavior because it is congruent with their value system ” (Kelman, 1958, p. 53) which is also considered injunctive conformity. In this form of conformity, the group’s beliefs become part of the individual’s belief system and the behavioral change is permanent. Examples of personal norms could include the individual desire to live a healthy lifestyle or help in social causes. The World Bank tested conformity bias in Latvia where The informal economy was estimated at 20.3% of the GDP in 2016 (World Bank, 2019). The shadow economy refers to people who operate entirely outside the tax and regulatory system (US Treasury). The World Bank intervened by sending out tax letters which incorporate behavioral changes in this case social norms. These modified letters are called behavioral letters. There is a social norm to return favors where people feel obligated toward those who have done something for them. This is called reciprocity. The social norms letter boosted timely tax filing compared to the control group by 5% (3.2pp). Social norms messages also generated the maximum number of tax declaration submissions as compared to other methods like simple reminders and an omission/commission letter when given to non-compliers. This experiment further showed that the social norms messages had a greater impact on women than men as women responded to the messages by 3.0 pp more when compared to the control group. This coincides with the findings of Cross (Cross, 2017) where women are more likely than men to conform to social norms. The social norms letter even increased the average amount paid per taxpayer by $13.97 (210% increase from control group). The field experiment in Latvia concludes that using social norms improves tax punctuality and increases the payment amount. In Poland, The World Bank tested the use of social norms (World Bank, 2017). The payment rate for the dunning letter was 40.2% while payment rates increased to 43.7%, the average payment amount increased from 1,123 PLN to 1,300 PLN, and outstanding liability was reduced from 6.26% to 6.17% where letters mentioning social norms were used. This experiment corroborates the findings of the Latvia experiment. According to an OECD report (OECD, 2010) on small and medium-sized enterprises (SMEs), SME compliance is highly influenced by personal norms. Phrases such as “Doing the right thing,” “Because it is the law,” and “Presumption from Revenue that you have been honest,” are indicated as having a strong influence on compliance. Social norms affect these SMEs less compared to personal ones as the owner's personal norms may be more prominent. Personal norms are feelings of moral obligations to do “the right thing” (Schwartz & Howard, 1981). The owner can also easily implement changes based on their prioritized heuristics . Social norms may not play a crucial role in the taxpayer's mind as the owner would want to be unique compared to larger firms. Therefore when the government tries to evoke conformity by using other firms as an example small businesses might not be encouraged to pay taxes. Responses related to personal norms are therefore stronger from a compliance perspective. Hence,it would be much more beneficial for the government to use personal norms on SMEs to improve tax compliance. A field experiment in the UK (Behavioural Insights Team, 2012) examined the effect of various types of norms on taxpayers who had declared their income but had yet to pay their taxes. Three norm statements were used: “Nine out of ten people pay their tax on time” (basic norm); “Nine out of ten people in the UK pay their tax on time” (country norm); “Nine out of ten people in the UK pay their tax on time. You are currently in the very small minority of people who have not paid us yet” (minority norm). Upon receiving the responses the economists learned that the basic norm statement produces a treatment effect of 1.3%, and the country norm statement produces a treatment effect of 2.1%. If these letters were sent to the entire tax-paying population there would be a £623,000 and £980,000 increase in total taxes paid within 23 days. In comparison, the minority norm statement had a much greater impact of 5.1%, which would represent a £2.367 million increase in taxes paid within 23 days. This underscores the highly effective method of using the conformity bias to improve tax payments. A follow-up experiment was done to replicate the most effective treatment from the first experiment to increase credibility. The effect of descriptive (what others do) and injunctive (what others think should be done) norms were also compared. Results showed that reminder letters with the norm framings have a 7.1-7.8% effect on payment. Letters with norm statements motivate people to pay their taxes, especially when a minority norm frame is used. This boosts overall tax compliance. Moreover, when comparing descriptive and injunctive, the data indicates that the descriptive treatment group has a 1.44% larger effect on payment than injunctive norms. Furthermore, this work reinforces wider evidence that descriptive norms are most effective when they can be targeted at a specific population or group, which in this case was achieved by referencing their local area. Applying successful messages throughout HMRC’s (UK's tax, payments, and customs authority) debt management practices led to £210 million being brought forward in the 2012/13 financial year alone. This would benefit the government greatly as they can use this revenue to provide subsidies and provide fiscal stimulus to the economy when needed. By using social norms, taxpayers gain a sense of fairness, knowing that their neighbors and fellow citizens are held to the same standards. This creates transparency between the government and taxpayers. Taxpayers are more willing to file taxes on time when they have faith in their government (Jimenez, Iyer, 2016). To inform taxpayers and foster healthy personal norms, tax administrations may attempt to communicate messages that emphasize the significance of compliance. Engaging with young professionals can have an impact on their beliefs, which improves long-term tax compliance. Individuals are less likely to avoid their taxes if there is a sense that tax evasion is rare and the bulk of people are compliant. People frequently assume that disobedience is more common than it is. Therefore, dispelling misconceptions about the extent of evasion strengthens compliance and has a marginal cost for the policymaker. This increases tax compliance and reduces financial losses for the government. IV. Status Quo Status quo bias refers to the tendency to stick to one's current situation (Samuelson and Zeckhauser, 1998). Most decisions have a status-quo option and studies show that individuals tend to unjustifiably stick with the status quo (Samuelson and Zeckhauser (1988); Anderson (2003)). People are often unwilling to change primarily because of the effort it takes to understand other available options or the lack of awareness about the alternatives. Christopher J. Anderson researched status quo bias and characterized this behavior as “conservation of energy” (Anderson, 2008) where humans do not decide unless a deadline is coming. In terms of income tax, this can be seen as taxpayers continuing to avoid paying taxes as they have already done so for an extended period. Not paying taxes has become the status quo of these taxpayers. Now there are many methods of filing taxes that are faster and more efficient, however, taxpayers seem to stick to the older methods. This could cause financial losses for the government as they don’t receive the full tax amount they are expected to collect. There also could be incomplete taking up of tax benefits such as Earned Income Tax Credit (EITC), Standard Deductions or Itemized Deductions in the USA when that is not their status quo. People tend to favor minimal changes and choose the default option (Kahneman, 1991). Even if there are better options, they will not change their actions or choices. Most real-world decisions have the status quo option. That is, do nothing and keep the current or previous state showing the significant influence default choices have on behavior. The World Bank (World Bank Group, 2018; World Bank Group, 2019; World Bank Group, 2020), experimented with status-quo bias and its societal prevalence. They used a deliberate choice method to overcome the bias wherein non-compliance was considered a deliberate choice. This technique is intended to eliminate omission that serves as an excuse for non-compliance. Taxpayers unknowingly evade taxes by following the status quo. When they received letters they were made aware of their status quo so that lack of information can no longer be the reason for non-payment. Framing noncompliance as intentional minimizes uncertainty regarding inaction, heightens moral duties to take action and boosts the perception of deterrence. For instance, the deliberate decision letter in Guatemala (World Bank Group, 2020) contributed to an increase of $17.95 (269% increase compared to no letter) in the average amount paid per taxpayer. Taxpayers in Guatemala who received the behavioral letters in the first year paid four times as much in taxes. Over time, these gains have been maintained. The intentional choice letter, when received, raises the average amount paid by $23.05, according to local average treatment effects (LATE). If this letter was sent to all the sampled tax-payers an estimate of US$757,837 of extra tax revenue could be generated in 11 weeks compared to when no letter was sent. This is over 35 times the cost of sending the letters highlighting the benefit to the government. The experiment with the status quo made use of framing as well. The phrase also exempts the taxpayer from failing to declare previously, which introduces a concept of reciprocity as the taxpayer is driven to feel he has been offered a favor. The wording suggests that the taxpayer's actions are being closely monitored, which heightens the feeling that noncompliance will result in penalties. In Guatemala, the deliberate choice letter, social norm letter, national pride letter, and behavioral letter were tested. Out of them, the deliberate choice letter was the most effective letter for improving declaration rates, boosting declarations by 5.4 pp (46% increase) compared to the control group. The average amount paid conditionally on payment grew by 38.5 percent, and the payment rate increased significantly by 1.4% points. Further, the average unconditional amount increased from US$6.70 the control group average to US$17.95 showing an increase of US$11.25 in tax revenue for each letter sent. The average cost of sending behavioral letters lowers as the rate of payment and payment amount increases. Omission is the failure to fulfill a moral obligation, in this case, taxes. The World Bank used 3 different behavioral designs to overcome the status quo in Poland (World Bank Group, 2018), the treatments were "Omission + Deterrence", "Omission vs Commission" and "Omission Taxpayer-Perspective". These letters all suggested that the government had given the taxpayers the benefit of the doubt, presuming that non-compliance had been due to oversight and not dishonesty. The letters inform the taxpayer about non-compliance and the potential consequences of non-compliance in the future Upon analysis, it was found that the letter combining omission and deterrence messages was the most effective. It resulted in a 48.6% payment rate (8.37% increase) and increased taxpayer payments by 25.9%. The "omission + deterrence" letter also had the most significant reduction in outstanding tax liability, 19.3%. The use of only a deterrence message does not improve the standard behavioral letter as the standard behavioral letter had a payment rate of 46.3% compared to 44.8% for only deterrence. However, there is a significant gain when paired with the omission letter as payment rates jump from 44.8% to 48.6%. The other omission letters, which offer an excuse for noncompliance, do not yield a significant improvement in payment amounts over the standard behavioral message, despite increasing the compliance rate. The "omission + deterrence" letter was found to be the most effective out of the 3 categories of letter design and was always in the top 4 in increasing tax revenue. The omission letters also performed better overall than the behavioral letters suggesting that the omission message encourages payment mostly among tax- payers with a smaller liability; combining it with the threat (omission + deterrence) is very effective for taxpayers who owe more. In Latvia (World Bank Group, 2019), an experiment using a simple reminder, a social norms letter, and an omission/commission treatment was done. The omission/commission treatment was found to be most effective in increasing compliance with taxpayer filing deadlines and the annual income statement (AID) process. It led to a 9.4% higher filing rate than the control group, a statistically significant improvement. It can be inferred that including social norms is not as effective as using omission in improving tax compliance as the omission/commission treatment increases compliance with taxpayers following deadlines. Another experiment in the UK (Behavioural Insights Team, 2012) related to reducing the cost or inconvenience of filling out forms to pay taxes was done. Initially, only a simple letter with details of the payment form attached, was sent which achieved a response rate of 19%. Subsequently, this letter was updated to include the tax timelines and a link to the online system as well as contact information in case of questions. This significantly reduced the effort of the taxpayers. The simplification of the process helped many taxpayers overcome the status quo as they could start the tax filing process by just clicking on the link. This resulted in an improved response rate to 23%. This reduction in work aligns with Anderson's research, which suggests that individuals tend to default to the status quo as a way of conserving energy. Online tax calculators could also be made more readily available so taxpayers can calculate the total tax they need to pay. This can help avoid delays due to dependence on tax accountants and overcome the status quo bias of relying on the accountant completely. The benefits of simplification and digitalization are transferable over different aspects of a tax structure. In the USA taxpayers have two options to reduce their taxable income: standard deduction or itemized deduction. The standard deduction is a fixed amount that reduces taxable income without requiring documentation, while itemized deductions allow taxpayers to subtract specific expenses (e.g., medical costs, mortgage interest) if they exceed the standard deduction, though it requires detailed record-keeping and filing. Most taxpayers opt for the standard deduction due to its simplicity. This decision to itemize deductions versus claiming the standard deduction provides another lens into how complexity influences taxpayer behavior. While itemizing can result in larger deductions, it imposes higher compliance costs, including meticulous record-keeping and additional forms. Revealed preference analysis suggests taxpayers perceive the burden of itemizing as equivalent to 19 hours of regular work or approximately $617, deterring many from pursuing this option (Benzarti, 2015). Consequently, two-thirds of taxpayers opt for the standard deduction, potentially leaving money on the table. This highlights another aspect of the tax system that is often overlooked by taxpayers and sticks with the status quo. If information was more readily available and digitalization of calculating deductions itemized income could be implemented, it could nudge taxpayers to choose the options with greatest savings. Throughout the year, individuals make taxable income and make payments based on anticipated liabilities. On tax day, any discrepancy between total taxes owed and payments made is refunded, resulting in either a "loss" (balance due) or a "gain" (refund)(Jones, 2017). Kahneman and Tversky (1979) demonstrated that the perceived value of a marginal dollar declines sharply as a taxpayer moves from losses to gains. This loss aversion drives taxpayers facing a balance due to manipulate their liabilities more aggressively. Empirical analysis done by Jones of the 1979–90 IRS Statistics of Income Panel of Individual Returns, revealed significant shifts in the balance due distribution consistent with higher manipulation in the loss domain. Individuals facing a loss pursue an additional $34 of tax reductions above and beyond what would be pursued if they faced a gain. This highlights how taxpayers allocate more value to perceived losses and are more likely to change their behavior by changing their status quo to minimize their losses. This is particularly pronounced among high-income earners, underscoring how loss aversion exacerbates tax manipulation, ultimately depriving the government of revenues that would otherwise have been collected. It was estimated that if tax filers owning a payment were as motivated to manipulate as those facing a refund, 1.4 billion dollars of additional tax revenue would be collected. Addressing this behavior by incentivizing over-withholding or reducing opportunities for manipulation could mitigate these losses and enhance revenue stability. V. Possible tax policy With the help of these field experiments, we realize that status quo, conformity, and framing biases play a pivotal role in tax revenue collection. These biases are often used by taxpayers to make their lives easier by doing what others do or sticking to their original choice. Governments should implement these behavioral findings into their current tax policies. By doing so, overall tax compliance from taxpayers would increase and cause less financial loss for the government as seen from the above case studies. They can successfully plan and fund projects and schemes that benefit the country's citizens. Below is a proposed framework outlining plausible policies and strategies that can be implemented to overcome the aforementioned biases. The use of hard-tone language in tax letters, such as deterrence messages and execution letters, can increase tax compliance. Field experiments in Poland show that hard-tone letters were more successful in mobilizing payments and reducing tax debt compared to soft-tone letters. This method is particularly effective for older working age groups, who need a greater nudge. They have been paying taxes for a long period and have developed lethargy regarding this continuous and tedious process. Soft-tone letters were also found to be effective in improving compliance rates, but not as impactful as hard-tone. In most cases, only hard-tone should be used throughout the letter to make the need to pay taxes seem more urgent and prevent defaults. However, to increase tax compliance overall, governments should use a soft tone in letters to certain taxpayers based on their social identities. For example, hard-tone letters may not be effective with taxpayers who do not support the party in control. Soft-tone letters could also be used for younger taxpayers (ages 20-30) who may be more willing to comply with rules and regulations. Additionally, using a soft tone in letters to taxpayers with school-going children may be effective as they may be more willing to pay taxes to support the public education system. A hard-tone could be used for older taxpayers (50+) as they are more receptive to the hard-tone than the soft-tone. Moreover, the hard-tone can be implemented on non-parents as they need to be nudged more as they have lesser responsibilities (no children). Simplifying the tax letter by removing legal jargon and providing clear steps to follow for tax paying will expedite the process and will increase tax revenue. This can overcome status quo bias and reduce the complexity of decision-making. Evidence from the UK and Belgium shows a positive correlation between clear and concise tax letters and compliance rates. Simplification also reduces the reliance on automatic systems and encourages timely payments from both late filers and payers. The government can take advantage of the status quo bias by making tax deductions from employee salaries by the company the default choice. The company can pay the income tax collected directly to the government along with its corporate taxes. This is called an opt-in policy as the status quo is to opt in. Most employees would prefer to stay with the status quo as it reduces hassles for them. Another opt-in policy could be where the government directly estimates how much the employee has to pay. At the end of the financial year, the taxpayer can compare how much tax was estimated and collected by the government compared to how much they need to pay. This works on similar principles of advanced taxes where the employee estimates his payable tax amount and pays it to the government quarterly. This solves the problem of how to pay taxes for the taxpayer as the government is doing it automatically for them and helps them overcome their status quo. The use of social norms was also greatly experimented with in Latvia, Guatemala, Poland, and the UK. This underlines the importance of social norms in tax policies. It was found that personal norms hold a higher value than social norms in individuals and small and medium enterprises. Governments can use these findings to implement personal norms. These can be simple pieces of information regarding an individual's belief systems. Descriptive norms were found to be more impactful than injunctive norms in the UK. Governments should use personal norms when distributing tax letters to small-scale companies but use descriptive norms in the letters they send to individuals. Lastly, along with these norms described above the government can club it with a minority norm. This puts a spotlight on defaulting taxpayers who feel like they are not part of the desired group encouraging them to file their taxes. This will make the most efficient use of the conformity bias. Using a "worst offenders" list will also be effective as there would be a perceived social consequence to being on the list. People will increase their tax compliance so that they are not the exceptions. This phenomenon of feeling uncomfortable when not conforming is called the “spotlight effect” (Gilovich, 2000). The Australian tax office's real-time analytics initiative sends customized prompts to taxpayers filing annual tax returns (OECD, 2021). For example, a taxpayer may see a pop-up notifying them that they have reported work-related expenses unusually high and prompting them to confirm their entries. The initiative prompted 25% of taxpayers to voluntarily amend their tax returns, generating approximately AUD$ 22.4 million in revenue from 2018 to 2019. This method can also be used so that tax filings are honest and accurate. Along with these customized prompts, Another small change that can be implemented to the tax filing website is subtle environmental cues such as smiling faces and a friendly telephone voice. These small nudges can stimulate cooperation among taxpayers and overcome the status quo of not paying taxes or partial payment of taxes. Similarly, this also implements a soft tone to gently nudge taxpayers to be honest with their tax fillings. 5.1 How does behavioral economics advance cost-effectiveness as opposed to traditional economics? Behavioral interventions are extremely effective while having minimal additional costs as compared to the original tax letters. The average revenue collected is more than the average cost, hence highlighting that this method is extremely cost-effective for the government. The field study conducted in Guatemala (World Bank Group, 2020) helped increase revenue generated but at the same time was particularly cost-effective. It was estimated that the deliberate choice message would have generated revenues of USD 778,927 at a cost of $21,090 if sent to the entire sample of 43,387 taxpayers. This equates to 36 times the return on investment for tax authorities. It was estimated that $303,366 in revenue was generated and declared a profit of $288,301 for the Guatemalan Tax Authority showing it is beneficial to apply behavioral changes. Moreover, since there are no statistically significant differences in delivery method outcomes, the option of sending reminders by regular mail can simplify execution procedures in Poland without affecting revenue collection. However, for tax payments, tax authorities can use existing technology, such as websites and smartphones, to facilitate compliance on a modest budget. In Kosovo (World Bank Group, 2019) emails and SMS messages were used to send out behavioral tax letters instead of paper mail. This slightly reduces the overall costs resulting in increased tax revenue. The only major cost would be incurred while setting up the infrastructure. In years to come only small maintenance costs would be incurred making it a cost-effective solution in the long run. The government can make these design changes to its tax policies and use these biases to its advantage and work towards effectively increasing its tax revenue. These changes are uncomplicated, cost-effective, easily implementable, and have achieved a positive impact worldwide. Hence it is the best possible solution available to limit the financial loss currently being sustained by the government due to non-payment of taxes. VI. Conclusion The World Bank Group has extensively researched how to successfully implement behavioral changes to tax policies. Behavioral changes are very helpful as they increase tax revenues and receiving correct tax amounts on time helps reduce financial losses for the government. They have run field experiments in various countries, like Guatemala, Poland, and Kosovo, and have found compelling evidence on how to nudge taxpayers to be more compliant. The 3 biases explored in this paper are only a few, many other biases and heuristics such as availability and loss aversion are present in the tax-paying process which also negatively affect the government. 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Author Name < Back From Sex to Science: The Challenges and Complexity of Consent Matthew Grady I. Abstract Since the beginning of biomedical research on human subjects, the notion of consent has been widely debated and highly contentious. With philosophers and bioethicists focusing on the issue of what constitutes truly informed consent and the proper ethical guidelines for retrieving it, the existing notion of consent in biomedical research fails to fully consider the potentially coercive forces on participants. Consent has also been an issue of import amongst philosophers of sex and feminist scholars. Rallying behind the contemporary idea of a robust version of consent—one that fully encompasses the ways in which agents may be coerced into consenting to a sexual act—these philosophers have argued that societal norms, external pressures, and the nature of consent itself often render consent insufficient to guarantee the moral permissibility of sex. I will argue that these two seemingly distinct concepts of consent in sexual and biomedical spheres face many of the same ethical issues. Borrowing from recent discussions around coercive factors influencing consent in sexual interactions and my own experiences in biomedical research settings, I will draw parallels between these two notions of consent in order to illuminate a more accurate and robust philosophical framework for setting ethical guidelines around obtaining consent in biomedical research settings. II. Introduction As biomedical research has increased exponentially with regard to both enhanced funding for the practice of human-subject experimentation and new research methodologies for promising medical interventions, there is an urgent need for robust ethical guidelines around utilizing human subjects in biomedical research contexts. This paper will focus on the use of human subjects in average biomedical research experiments, which typically recruit and pay individuals to undergo a certain medical procedure, take a specific drug, etc. before approval of the medical intervention for the general population. Across all of the varying perspectives regarding how to best recruit, treat, and compensate human subjects, consent has remained an absolute standard and necessity for conducting ethical biomedical research. While philosophers and bioethicists have contentiously debated over the necessary conditions for obtaining consent, most have widely (if not completely) neglected factors that may wrongfully induce human subjects to consent to biomedical research. Consent has also been a central topic of importance within the philosophy of sex and feminist p hilosophy, yet its development has remained quite distinct from the understanding of consent in the field of biomedical research and subject recruitment. Philosopher and bioethicist Alan Wertheimer has made a connection between the notion of consent in sexual interactions and biomedical research, but my parallels and conclusions will clearly be distinct from his and will primarily focus on developing thoughts inspired by the initial connection made by Quill Kukla in “A Nonideal Theory of Sexual Consent.” In sexual interactions, most philosophers agree that consent is a necessary, but insufficient, element for ensuring the permissibility of sex between p artners. Consent is something to be given freely, and many forces may serve to coerce or influence an individual into granting their consent, thus potentially curtailing the normative goal of “ideal” consent. Traditional discussions of consent are structured around fulfilling the normative goal of obtaining consent that is free from undue influence on one’s agency, autonomy, ability to make rational decisions, etc. Consent, under this view, is either valid or not—anything constraining an agent’s ability to consent automatically invalidates its moral force. Quill Kukla has introduced a “nonideal theory of sexual consent,” which classifies consent as degreed and emphasizes that genuine consent can still be achieved in the presence of potentially coercive factors. Under this conception, agency and autonomy are present in lesser and greater degrees within different sexual interactions, and agents are continually pressured by coercive forces. Thus, consent is not valid or invalid; instead, genuine consent (or robust consent as I will often refer to it) is built when coercive factors are controlled to such a degree that all sexual partners possess sufficient agency to make a fully rational decision to consent. This does not deny our ability to determine whether a sexual act is morally permissible and establish a standard for morally permissible ways to obtain consent. Rather, it allows us to adopt a nuanced view of consent as a nonideal concept, wherein agents can consent under our oft-constrained and coerced statuses. Philosophical inquiries into coercive factors impacting one’s ability to obtain genuine, robust consent in sexual interactions have focused on external pressures, societal norms, and the implications of consent as the dominant framework itself. Yet, bioethicists have neglected this crucial area in their understanding of consent. Much can be gained for our existing notion of consent in biomedical research settings by embracing the approach taken by philosophers of sex. Consent operates in many different facets of life—agreeing to consent forms, consenting to a sexual interaction, consenting to someone entering your home, and many other forms of implicit and explicit acts of consent . However, the nature of consent within sexual interactions and biomedical research settings is distinct from other forms, making them especially morally-laden. Given violations of these kinds of consent are particularly harmful to one’s bodily autonomy, sexual interactions and biomedical research settings are especially deserving of rigid consent guidelines. The genuine robustness of these two forms of consent is also dependent upon the satisfaction of external conditions not always under the control of the agent granting consent (ex. a non-coercive partner in sexual interactions or a biomedical institutional review board that grants approval for a biomedical experiment), opening up the potential for coercive factors to render a certain act morally impermissible. T hese two distinct forms of consent face many of the same ethical issues and should be engaged in a conversation with one another—a conversation that has been neglected thus far. I hope to build a more accurate, encompassing framework in the biomedical sphere by which we can set ethical guidelines for engaging human research subjects in a truly consensual manner based on the progress made by philosophers of sex, like Kukla and others. To conduct this comparative analysis, I will begin by discussing the existing notion of consent within the biomedical research field and detailing the major issues of importance currently debated. I will then proceed to review the ways in which many philosophers of sex have taken a broader approach to defining consent—one that takes into account the coercive factors that may inhibit an agent’s ability to grant consent with full autonomy and agency. I will then draw comparisons b etween these two distinct notions of consent to reveal several coercive factors in biomedical research settings that may render “informed” consent coerced. Finally, I will suggest how we may build a broader philosophical framework to scaffold the agency of human subjects when consenting to potentially dangerous biomedical research experiments. III. The Existing Notion of Consent in Biomedical Research After many instances of harmful treatments being given to vulnerable, often marginalized populations, such as the Tuskegee Syphilis study, bioethicists began to question what truly constitutes informed consent in biomedical research settings. This question has included exploration into both the b est ways to obtain consent, as well as the proper way to interpret the term, “informed.” The p redominant conclusion on how to best define informed consent has overwhelmingly neglected consideration of coercive factors that impact the ability for human subjects to rationally consent to biomedical trials. As will become clear, there are an abundance of underexplored factors that may constrain one’s ability to rationally consent to participate in a biomedical research trial. This paper aims to fill this lacuna in the current understanding of biomedical research consent. There are many interesting debates around the understanding of biomedical consent that will become relevant to my argument later, the first being the therapeutic misconception. This phenomenon occurs quite often in biomedical research settings, where human subjects possess the incorrect belief that they are receiving life-changing or potentially beneficial treatments, despite being told about the potential of receiving a placebo treatment, or the chance that the experimental drug may be ineffective. The implications of the therapeutic misconception for ensuring the genuine nature of a human subject’s consent are vast. Consent hinges upon an agent’s uncoerced ability to make an informed decision, and philosophers of biology have rightfully debated what constitutes truly meeting the informed standard of consent. Can one really be said to have full decision-making agency and possess the needed information to genuinely consent if they wrongly believe, as subjects with the therapeutic misconception do, that they are guaranteed life-saving treatment? This is not to say that consent is in some way unobtainable in biomedical research settings; however, we ought to properly understand the implications of the therapeutic misconception on a subject’s ability to grant their consent in a knowing, informed fashion. In addition to the therapeutic misconception, there is another important debate around whether informed consent requires comprehension in any way. Some argue that full comprehension of what the study entails is the only way to ensure the participant is aware of all of the risks and does not possess the therapeutic misconception. Participants have also been shown to severely misunderstand the actual p rocedures, treatments, etc. they are consenting to, whether that be due to not reading the consent form or not fully understanding the researcher’s explanation of what will occur during the study . By not comprehending both the purpose of the study and the exact particulars involved in it, research subjects may fail to meet the “informed” requirement of informed consent. Regardless of the exact answers to these concerns, it is clear that the current discourse surrounding biomedical consent has yet to satisfactorily explore the intricacies of the coercive factors impacting consent in medical experiments. Participants may be hindered in their ability to grant genuine, uncoerced consent when, as research shows is often the case, they do not understand the purpose or specifics of the research study to which they are consenting. In a way, participants in many biomedical studies consent to a version of the study that does not carry the significant risks of harm they take on when consenting—is this morally permissible? How can we ensure coercive factors, like the therapeutic misconception, do not wrongly influence a human subject to consent to a potentially dangerous experiment? These ethical issues debated within the philosophy of biology can be b etter answered with a revised, robust version of consent—one which thoroughly examines and addresses the coercive factors that unduly encourage someone to grant consent without b eing truly informed and open to participating. IV. Moving Beyond Mere Consent: Philosophy of Sex While consent works to p reserve the agency of a sexual partner, the vast majority of philosophers agree that consent is necessary for sex to be morally permissible, not sufficient. When consenting to a sexual act, a person is utilizing their agency and autonomy—their capacity to make free and independent decisions to meet their own ends—to make a rational choice, so consent both contributes to and draws from one’s agency. We now recognize the ability of rational agents to utilize their agency to consent to sexual acts that may still be morally problematic, whether that consists of morally dubious sexual actions or acts obtained with a coerced notion of consent. Given the importance of sexual consent, we need an understanding of it that can account for any and all factors that may coerce a sexual partner into granting consent when they otherwise would not have. Philosophers have addressed the issue of consensual sex that may be coerced in a variety of fashions. Some feminist scholars, like Catharine MacKinnon, have taken a radical approach, claiming that no consent is truly valid under heteronormative structures. Their understandings of consent highlight the ways in which external societal conditions may render consent insufficient if they constrain one’s options to the point where consent becomes obligatory, rather than freely given. Nicola Gavey provides a compelling account of how heteronormative , oppressive structures may render one’s consent involuntary or obligatory in sexual situations because of societal conditions pressuring women. Women sometimes feel obligated to consent to unwanted sexual advances because of the heteronormative forces that pressure them to enter a subservient, diminutive role within sexual interactions. Other philosophers take a different approach to consent by illuminating varying ways in which traditional consent is not sufficient to guarantee a good moral standard for sex. Power dynamics, a misunderstanding of what will actually take place during sex, the offer of money, socialized b ehaviors, and societal pressures are all examples of coercive factors that may encourage one to say yes, even when one did not originally intend to. A person may not be able to fully, rationally consent to a sexual act if pressured by these sorts of coercive factors. Philosophers operating with this lens focus less on making a valid versus invalid distinction of consent and instead emphasize the way consent can be constrained or limited by oppressive structures and other coercive forces. The moral permissibility of a sexual act depends on the agency and autonomy possessed by all of the sexual partners consenting, which may be constrained by coercive factors. By emphasizing the coercive factors outside of direct threats from a partner that may constrain one’s genuine consent, feminist philosophers have been able to build a more robust understanding of consent—one that accounts for the coercive factors that may wrongfully influence one to consent to a sexual act. To summarize all of this into a more digestible framework, I find Quill Kukla’s non-ideal theory of consent to be particularly illuminating. Essentially, under Kukla’s perspective, consent is a “nonideal concept,” where virtually no sex will turn out to be consensual if consent requires the full autonomy of its participants. Their framework allows for the permissibility of sex and obtaining consent even when coercive forces are present; all agents are constrained in different ways, by different power relations, as a result of different identities, and that does not fully invalidate our ability to consent. Instead, to ensure one’s consent is genuine in the presence of common coercive factors, Kukla argues we must “scaffold” consent by “[being] sensitive to the limits of and possibilities for agency and consent in a given context and [adjusting] accordingly,” to ensure a partner possesses agency and autonomy. Scaffolding can be accomplished socially or interpersonally, where practices, environments, and relationships can help to enable a sexual partner’s agency. Kukla uses the example of a retirement facility embracing guidelines, policies, and management that allow its patients to have sex in such a way that does not threaten their ability to participate safely or diminish their own agency in pursuing sexual relationships. On the interpersonal level, agents can also aid in scaffolding their sexual partner’s (or partners’) agency and autonomy by ensuring their partner feels the, “ability to exit a situation, trust, [and] safety,” among other crucial practices that build and protect one’s ability to genuinely consent. Policies here scaffold consent by examining potential coercive factors and building social practices which are inclusive and protective of sexual agency. Again, philosophers of sex, like Kukla, have explicated external factors, such as power dynamics, money, the traditional, overriding depiction of a woman “giving” consent to a man’s request, and heteronormative structures, that may coerce someone to consent to a sexual act. In identifying these, philosophers can strategically recommend scaffolding structures to ensure the moral permissibility of sexual interactions and to enhance the agency and autonomy of sexual partners. I argue that the bioethicist ought to take on a similar project of identifying coercive factors and scaffolding their designs to preserve agency, autonomy, and genuine consent in biomedical research experiments. This challenge has been neglected thus far, and the current understanding of informed consent fails to fully account for coercive factors; thus, the biomedical research community is in need of a scaffolding strategy to preserve genuine, robust consent. The following section attempts to embrace the approach taken by Kukla and others in developing a more robust theory of consent within biomedical research settings. V. Can Biomedical Research Achieve Genuine, Robust Consent? To curb coercive factors from playing a role in one’s decision to have sex, Kukla proposes a more robust, nonideal theory of consent, which works to scaffold protections for an individual’s autonomy in the process of granting consent. Kukla’s framework understands that agents are constantly influenced by external, coercive factors. I argue that we should embrace this approach in the b iomedical research field, which requires a thorough understanding of the implicit and explicit factors that encourage participants to grant consent to medical experiments and treatments. I will now begin to detail four p rimary coercive factors that have been underexplored by philosophers of biology, highlighting the direct parallels that can be found with the coercive factors that impact sexual consent. In drawing these parallels and embracing a more robust understanding of consent, this paper will aim to demonstrate the need for greater encompassing ethical guidelines around biomedical research experiments. A. Compensation: Fair or Coercive? The standard practice for most biomedical research trials is to compensate their human subjects for their participation and time spent completing the study (and any additional costs incurred, medical expenses, inter alia). To recruit enough human subjects for a statistically valid biomedical study, researchers must offer compensation as an inducement to p articipate. Many ethical questions have been explored by philosophers and bioethicists, including how much to pay human subjects, whether payment for certain kinds of research is morally acceptable, and if payment can truly compensate for the serious risks involved in participating in experimental research. However, most have neglected to explore the role money plays as a coercive factor to participate in potentially dangerous research and its impact from a scaffolding perspective. Participating in biomedical research can be a valuable way to earn both active and p assive income, yet money is known to influence the rational decision-making of moral agents. Might someone “consent” to engaging in a biomedical research study that crosses their ethical and/or physical level of comfort in desperation for money? Philosophers of sex have rightly acknowledged that money can serve as an influential and potentially coercive force for consenting to certain actions because an agent may, in an attempt to earn crucial income for themselves, consent to sex in which they would not normally be comfortable engaging. A very similar ethical dilemma arises in the case of biomedical research. Consider this fictional example: an extremely poor woman who struggles to pay for her basic necessities agrees to take a highly experimental drug that could have damaging, long-term side effects. She would not normally endanger her own health in this way, but she is so desperate for passive income that this compensation is too important to pass up. Under the existing notion of informed consent in b iomedical research, this kind of participation would still be considered fully consensual when, clearly, money played a coercive role in her decision. This is not to say that all sexual interactions and all biomedical research settings involving the exchange of cash are coercive (e.g. sex work depends on the presence of money, but is not necessarily coerced), but we ought to pay crucial attention to these areas because of the morally problematic force money can have on obtaining consent. Money has the potential of encouraging and even forcing one into doing things they would not normally be comfortable with, so compensation is especially deserving of ethical guidelines. See Largent, et. al. for a further discussion of the concerns here. Imagine a case where someone decides to consent to a risky biomedical research trial with full comprehension of the risks and particulars involved with the medical study. They choose to accept all of the accompanying risks with participation because the potential compensation is worth their involvement according to a rational assessment by the agent in question. I concede here that this person may not be making a coerced decision to consent—this person, depending on the background circumstances and personal costs, may be choosing to utilize their agency to make a rational decision to pursue compensation. But, it is equally important for research designers to ask, ‘If this subject were in a greater position of agency and authority, would they still be comfortable with making the same decision?’ This question concerning the potential for coercive influence is neglected and unaddressed in the vast majority of biomedical research settings. Not all cases will reveal coercive factors influencing a subject’s decision, but bioethicists have neglected to fully accept the incredibly powerful and sometimes coercive influence compensation can have on a person’s ability to rationally consent. Furthermore, many research studies design their compensation schedule in a way to coerce participants into completing the entirety of a biomedical experiment by offering a significant “bonus” at the end of the study. Given that consent hinges on the ability for an agent to say “no” at any time to any part of an experiment, compensation can wrongfully be utilized as a tool of coercion, in that a research subject may feel unduly compelled to complete a study in hopes of receiving the bulk of their compensation at the end of the research. Compensation, in this role, can coerce consent and thus render the consent given as less robust, less agential, and likely to be less morally permissible than a more scaffolded version of biomedical consent. B. Underexplored Power Dynamics Furthermore, there exist underexplored power dynamics that may induce individuals to consent to biomedical research that they might not otherwise. It is not uncommon for physicians to offer (or even suggest) participating in an experimental research trial to their ailing patients. The physician here possesses a status of authority and level of power that may wrongfully induce their patient to agree to participate, despite the overwhelming risks, in benefits to their own research or that of their colleagues. This is not to say that all actions by a doctor wrongfully operate on a power dynamic, but recommending someone to consent to a trial with clear and substantial potential for harm rightfully deserves a more critical lens for moral judgments. Another example worth noting is when professors recruit their students to participate in their own b iomedical research. Might a student consent to participate merely because their p rofessor, who is in a position of power, asked them to do so? I argue that both of these cases illuminate a power dynamic that may render the given consent here as below the standard for moral permissibility and fully robust consent. Just as a boss requesting to have sex with their employee possesses an imbalanced power dynamic, so do certain recommendations of research studies by people of authority. By understanding the coercive influence of underexplored power dynamics in biomedical research recruitment, we can begin to build a more robust theory of consent that accounts for this coercive factor. C. The Misunderstanding of Particulars By Research Participants As previously discussed, it has been well documented that human subjects often misunderstand the particular actions and risks involved with their participation in biomedical research trials. While comprehension is difficult to fully impart on human subjects, might some of these knowledge gaps wrongfully encourage one to consent to a research study? As mentioned earlier, if one is under the guise of the therapeutic misconception, they may be more willing to consent to potentially dangerous research in the hope of receiving free treatment; however, there is no guarantee they will receive any sort of efficacious medical intervention. Research participants are also often unaware of the particular procedures, treatments, etc. they will have to undergo, meaning they cannot grant fully informed consent to them. A similar ethical dilemma arises in the case of sexual consent: one may consent to a sexual interaction without knowing the full breadth of what will occur. Biomedical researchers ought to work (or alternatively, “scaffold”) toward ensuring their research participants have full knowledge and comprehension of any factor of the research that might change their decision to consent. Only a more robust consent framework within biomedical research settings can properly protect the autonomy of human subjects to provide truly informed consent. D. Lack of Knowledge Regarding Research Intentions The final factor that I argue merits greater consideration in our ethical guidelines around b iomedical consent concerns the ability of the patient to understand the intentions of the research. Due to the nature of biomedical research, human subjects are often not informed of every detail of the study in order to maintain scientific objectivity and integrity. So, a human subject may be told what the study consists of, while not fully understanding the intentions of the research. What if a human subject consents to participating in a Phase I biomedical trial without knowing that the intention of the research is to produce a drug that only the extremely wealthy will be able to afford (an unfortunately common occurrence in the US)? Or, what if the aim of the research is to reach a conclusion that goes against one’s own morals, like that racial differences are essential rather than constructed? Just as one possesses a right to know the intentions behind their partner asking for consent to have sex, human subjects have a right here as well because the information presented may actively encourage one to not offer consent in the first place. Our existing definition of consent for human subjects in biomedical research experiments does not properly account for preserving, or scaffolding, the full rational decision-making of human subjects. While understanding the need for a certain level of confidentiality, the intentions behind the research itself may serve as a deterrent for someone to grant consent. So, in order to have genuine, robust consent, we must be able to set ethical guidelines that actively inform the participant of any detail that may render their consent below the bar for moral permissibility if unknown. VI. An Argument for a More Robust Consent in Biomedical Experiments I present these four coercive factors not in an attempt to develop a fully-fledged account of proper consent in biomedical research, but rather to demonstrate that our existing notion does not go far enough to protect the autonomy of human subjects. All four of these concerns do not apply equally in every context, but they do merit a greater, more nuanced understanding of consent and how to ethically scaffold against coercive factors. Philosophers of sex, like Kukla, have begun to p opularize the idea of a robust, nonideal theory of consent as a way to scaffold ethical precautions to engaging in sexual acts with a partner. The field of biomedical research ought to embrace a similar strategy and approach, and these four factors can begin to identify the key elements influencing the autonomy and agency of sexual partners. To scaffold a human subject’s ability to grant their uncoerced consent, we need to maximize their knowledge of anything essential to their rational decision-making. This would involve instituting clear and expansive policies to combat the therapeutic misconception and ensure participants understand the potential harms they may undergo. Researchers should also develop pay schedules and formats that work to ensure that the benefit incurred from compensation does not wrongly coerce one into participating or lacking the ability to revoke their participation at any time. Crucially, though, we ought to concurrently reform the issues of capitalism and systemic wealth inequality that force many people in the US to sell their own bodies for lifesaving income. Finally, we should adopt stricter guidelines for participating in biomedical research experiments to both restrict coercive power dynamics and pursue further scaffolding of subjects’ agency and autonomy. It is important to note, though, that this paper is primarily concerned with the philosophical issues that might constrain one’s genuine consent, and I invite bioethicists to create a more concrete and thorough list of ethical guidelines to scaffold agency in experiments. By conducting a rigorous philosophical analysis of coercive factors that influence human subjects, philosophers of biology will be better equipped to develop their own version of robust consent that can account for coercive factors. This new, reinspired lens from a philosopher of sex into scaffolding consent should help to control the damaging effects of coercive factors and grant the human subject greater autonomy in making rational decisions regarding whether and when to participate in biomedical research. Research study designers can utilize the recognition of these coercive forces, scaffold ethical practices to combat their influence on diminishing an agent’s authority and embrace a more robust understanding of consent in biomedical research experiments. VII. Conclusion My aim in this paper has been to draw parallels between the currently distinct notions of consent within sexual interactions and biomedical research to illuminate the similar ethical issues facing both. Many feminist scholars and philosophers of sex have taken an approach of examining the societal conditions, other external pressures, and nature of consent itself to illuminate the ways consent may be unduly coerced in rational agents. In doing so, they have been able to develop a more robust framework around a nonideal theory of consent that socially and interpersonally scaffolds (but not completely) a person’s agency in order to minimize coercive factors in one’s decision to consent to sex. By detailing parallel coercive factors present in the biomedical research field, I hope further philosophical inquiries will be able to develop a similar robust consent framework for biomedical research involving human subjects. On a more practically conclusive note, biomedical research experiments are luring; research designers purposefully advertise their studies to sound like easy, safe ways to make money, despite their risks. As shown by decades of research studies with devastating effects on communities of color, biomedical research experiments target specific populations…populations that are often BIPOC, low-income, young, and most vulnerable to being coerced into consenting in a biomedical research setting (see NIH for more on the crucially important element of structural medical racism). I’ve seen firsthand the consequences of a biomedical research industry that has consistently used advertising to tempt many young people, like myself, to participate in potentially harmful studies—experiments where we may not be in a fully agential capacity due to coercive factors. Money, power relations, a lack of understanding regarding the experiment, and other coercive factors constantly influence the ability for people, especially those of marginalized or fiscally disadvantaged backgrounds, to make a fully rational choice in consenting to biomedical research. 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