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The published version is available at
https://doi.org/10.35467/sdq/141351
Bargaining power and U.S. military aid in the post-cold
war era
Yu Wang
Yu.Wang02@xjtlu.edu.cn
International Studies, Xi'an Jiaotong-Liverpool University, No.8 Chongwen Road, 215123, Suzhou, China
Abstract
This study examines the effect of bargaining power on the allocation of U.S. military
assistance. Conceptualising U.S. military assistance as an aid-for-policy deal, it applies a
two-tiered stochastic frontier model to a data sample of the post-Cold War era. It shows
that the bargaining effect accounts for a huge variation in U.S. military aid distribution.
The volume of U.S. military assistance in equilibrium is lower than the baseline volume
by 4% at the mean and by 6% at the median. The donor U.S. extracts a slightly larger
portion of the transaction surplus at these central points. However, the game of surplus
division is not always about equally strong hagglers as it may first appear. In fact, the
quartile values show substantial variance in bargaining performance and, hence, an
outcome of surplus division across transactions. The bargaining effect is highly
significant in the allocation of U.S. military assistance in the post-Cold War era. The
donor U.S enjoys a bargaining advantage at the mean and median, but rich variations are
noticeable.
Keywords: United States, bargaining, military aid, Post-Cold War, Stochastic Frontier
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1. Introduction
In the past two decades, a growing empirical literature on the determinants of U.S.
economic assistance has considerably improved our understanding of the issue (Lai, 2003;
Gibler, 2008; Demirel-Pegg and Moskowitz, 2009; Button and Carter, 2014; Wang,
2016). This research achievement nevertheless highlights how little has been done on the
front of U.S. military assistance. There have been few, if any, empirical studies that have
presented systematic evidence bearing directly on the determination of U.S. military aid
since the landmark piece by Poe and Meernik (1995). As a result, our knowledge of the
issue based on systematic empirical research is limited to the mid-1990s.
This academic status quo is unsatisfactory for at least three reasons. First, existing
studies have shown that U.S. military assistance has controversial social-political
consequences in aid-recipient countries (Cingranelli and Pasquarello, 1985; Khilji and
Zampelli, 1994; Bapat, 2011; Sandholtz, 2016; Boutton, 2019). A well-built literature on
U.S. military aid can improve our ability to predict the chance and severity of these
consequences.
Second, foreign military and economic aid offer different types of resource transfer.
The transfer of defense-related resources such as military equipment and technology has
immediate consequences for the security of both donor and recipient. Due to fungibility,
economic assistance may also have security implications. However, the connection is
much less imminent and necessary. Hence, research on economic assistance cannot fully
substitute for research on military assistance, though the former sometimes provides
valuable insights into the latter.
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Finally, post-Cold War history has provided a rich sample of U.S. foreign aid that
many believe to be systematically different from the previous age. As a result, the Cold
War experience of military assistance might still be engaging for historical reasons but is
much less so in terms of practical relevance. Take the Sept. 11, 2001 terrorist attacks, for
instance. This epoch-making event has profoundly changed U.S. foreign and security
policy, of which military assistance is an important part. Since the Cold War era never
witnessed similar events on U.S. soil, updated studies on the allocation of U.S. military
assistance are needed to meet the intellectual demand in both academic and policy-
making circles.
The first objective of this research is to improve our understanding of the
determination of U.S. military aid in the post-Cold War era. In many respects, this study
responds to the call of Poe and Meernik (1995). For instance, the authors urged that
future research on the post-Cold War determinants of U.S. military assistance should
utilize a comprehensive data sample to transcend the limitations of the small-N analysis
and that both socioeconomic and political-strategic factors should be considered as
explanatory variables. Thanks to theoretical and methodological advancements in the past
20 years, these once-novel suggestions have become more standard in empirical studies
of U.S. foreign aid. This research follows these suggestions.
The second and more important objective of this study is to investigate the effect of
bargaining power on the allocation of U.S. military aid. My emphasis on the bargaining
effect is a fundamental deviation from the existing empirical literature regarding how to
conceptualize the distribution of U.S. military assistance. In particular, I argue for the
conceptual model of aid-for-policy transaction (Bueno de Mesquita and Smith, 2007;
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2009) as a competitive alternative to the prevailing model of unilateral decision-making
(Cingranelli and Pasquarello, 1985). Thus, the current research is not an exercise of the
prevailing research paradigm on a more recent temporal domain. Instead, it is a reflection
on what is the more appropriate way to model the determination of U.S. foreign
assistance.
The remainder of this paper is organized as follows. The second section brings the
issue of bargaining power to light by arguing U.S. foreign assistance as the outcome of
aid-for-policy deals struck with aid-recipient countries. It then develops an empirical
framework of two-tiered stochastic frontier that enables us to investigate the bargaining
effect. The third section introduces the data set in use and variable operations. The fourth
part discusses the results. The fifth section concludes.
2. Bargaining Power and U.S. Military Aid
2.1 U.S. Foreign Assistance as the Outcome of Aid-for-Policy Deals
Cingranelli and Pasquarello (1985) offered a general conceptual model of U.S. foreign
assistance. According to them, the allocation of U.S. foreign aid could be conceptualized
as the result of a unilateral decision-making process in two stages. In the first stage of
gatekeeping, the U.S. identifies the nations qualified to receive its assistance. In the
second stage of distribution, the U.S. decides how much each qualified country will
receive. Since its first appearance, this conceptual model has gained its popularity in the
empirical literature to explore various possible determinants of U.S. foreign aid, and
considerable efforts have been made to tackle the selection effect in the gatekeeping stage.
Poe and Meernik (1995) exemplify the application of this conceptual model in studying
U.S. military assistance. By applying the Heckman selection method, the authors argued
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that they could address the selection effect better and contributed to the literature at the
time.
It is interesting to note that empirical studies on U.S. foreign aid often start with the
Cingranelli-Pasquarello model without asking whether it provides an appropriate
conceptualization of the issue. The single most significant feature of the Cingranelli-
Pasquarello model is that it describes U.S. foreign aid as the outcome of unilateral giving
behavior and thus assumes away any possible influence of aid-recipient countries over
the issue. Although such a unilateral decision-making paradigm is quite common and
helpful in modeling charity behaviors of giving, it is largely at odds with empirical
observations that point to U.S. foreign aid as the outcome of transactions with aid-
recipient countries rather than a unilateral behavior of giving (Conteh-Morgan 1990;
Raffer and Singer 1996; Rai 1980; Dreher et al. 2008; Wang 1999; Neumayer 2003;
Fleck and Kilby 2010).
Bueno de Mesquita and Smith (2007; 2009) are probably the most apt in making the
point. By grouping the various self-interest motivations into the rubric of seeking policy
concessions from foreign nations, they conceptualized foreign assistance as the result of
aid-for-policy deals. Their logic is straightforward. Foreign assistance as a means of
resource transfer from the donor to the recipient incurs immediate costs to the former and
benefits to the latter. As long as donors care about their interest, they should be rewarded
in some way that is highly valued at home. Compared with donor countries, aid-recipient
countries are relatively poor regarding material resources but rich regarding policy
discretion. Aid-recipient countries value additional resources more than the policy
concessions they make, while donor countries value the policy concessions of foreign
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countries more than the resources they transfer. As a result, aid-for-policy transactions
naturally stand out as a focal point where governments in both donor and recipient
countries can advance their interests. It is worth noting that when the resource being
transferred is defense-related, the self-interest motivation of the donor might have an
even more prominent role to play because the transfer has imminent security implications.
Conceptualizing U.S. military aid as the outcome of aid-for-policy transactions
immediately highlights the issue of bargaining power. It is useful to recall that in any
successful transaction, the buyer’s reservation price must be higher than that of the seller.
In other words, the consumer must value the object in transaction more than the provider.
The gap between the two reservation prices then provides the range of a transaction
surplus over which the trading parties can haggle. For the commodity or service in
transaction, the seller bargains for a higher price while the buyer bargains for a lower
price (Osborne and Rubinstein 1990). These general rules should be applicable if U.S.
military aid is the result of aid-for-policy deals. In the aid-for-policy scenario, the U.S.
offers military assistance in exchange for a package of its favored policy adjustments
made by the aid-recipient government, which is not unlike the buyer on the economic
market paying the seller for its desirable commodities or services. Specifically, aid-
recipient countries, on the sale side, try to push up the volume of U.S. military aid for the
policy concessions they offer to make, while the U.S., on the buy side, tries to push it
down.
2.2 A New Empirical Framework
The current research adopts the following two-tiered stochastic frontier analysis
(Gaynor and Polachek, 1994; Polachek and Yoon, 1998; Kumbhakar and Lovell, 2000) to
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gauge the effect of bargaining on U.S. military aid. A discussion on the validity of
applying two-tiered stochastic frontier analysis (SFA) models to the bargaining effect on
bilateral assistance can be found in Wang (2016 and 2018).
( )
USMAID x w u v
= + − +
(1)
where
( )
xx
=
indicates how aid-recipient countries’ characteristics affect the
baseline U.S. military assistance,
w
represents the effort of the aid-recipient government
to push up the amount of U.S. military aid,
u
represents the effort of the U.S. to push it
down, and
v
is a normal noise.
By assuming that
w
~
2
. . . ( , )
ww
i i d Exp
,
u
~
2
. . . ( , )
uu
i i d Exp
,
v
~
2
. . . (0, )
v
i i d N
, and
the error components are independently distributed from
x
, Kumbhakar and Parmeter
(2009) derived the joint density function of the i-th residual
i
as
( ) ( ) ( ) ( ) ( )
ii
i i i
u w u w
Exp a Exp b
f c h
= +
++
(2)
where
2
2
2
iv
i
uu
a
=+
,
iv
i
vu
c
= − −
,
2
2
2vi
i
ww
b
=−
,
iv
i
vw
h
=−
, and
is the
cumulative distributing function of standard normal distribution. The estimates for
{ , , , }
w u v
can be obtained by applying maximum likelihood estimation (MLE) to the
following log-likelihood function
1
ln ( ; , , , ) ln( ) ln[ ( ) ( )]
ii
nab
w u v u w i i
i
L x n e c e h
=
= − + + +
(3)
where n is the number of observations of a data sample.
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The bargaining impact of the donor U.S., that of aid-recipient countries, and the net
surplus can be measured accordingly as
( )
( ) ( )
( )
( )
( ) ( ) ( )
2/2
1 | 1 1
ii i i v v i i v
u
i
i i i i
h Exp a b Exp c c
Ee h Exp a b c
−
+ − − −
− = − + + −
(4)
( )
( ) ( )
( )
( )
( ) ( ) ( ) ( )
2/2
1 | 1 1
ii i i v v i i v
w
i
i i i i i i
c Exp b a Exp h c
Ee Exp b a h Exp a b c
−
+ − − −
− = − +− + −
(5)
( ) ( ) ( )
1 | 1 | |
i i i i
w u u w
i i i
NS E e E e E e e
− − − −
= − − − = −
(6)
where
1/ 1/
uw
=+
. All these measures reflect the bargaining effect as percentage
change from the baseline military assistance (Kumbhakar and Parmeter 2009).
2.3 The Baseline Level of U.S. Military Assistance
In the previous section, the baseline volume of U.S. military assistance is assumed to
be a linear function of a vector of recipient characteristics. This section specifies those
recipient characteristics by reviewing previous research on the determinants of U.S.
foreign assistance. Two critical points deserve our attention here. First, although existing
studies tend to suggest similar determinants of U.S. foreign assistance, their conclusions
often conflict with one another due to differences in time horizon, variable operation, and
estimation technique. As a result, general agreement on the effect of any single
determinant is more likely to be an exception rather than the norm. Second, the existing
literature on the determination of U.S. foreign assistance focuses almost exclusively on
economic aid. Although certain determinants might influence both economic and military
aid, their impact on the two types of assistance could be considerably different. Given
this, the following review suggests the recipient attributes relevant to the allocation of
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U.S. military assistance. In other words, a variable is included as long as there is reason
to believe it could affect the allocation of U.S. military assistance, even if the exact effect
is far from conclusive.
Following Poe and Meernik (1995), I divide the traditional determinants of U.S.
military assistance into a socioeconomic group and a political-strategic group. The
socioeconomic attributes of recipient countries include national income, income per
capita, population, imports from the U.S., and the inflow of U.S. economic aid. Many
studies of U.S. economic assistance have suggested that small and poor economies face
more serious financial constraints than their larger and wealthier counterparts and thus
have more robust demand for additional resources (Meernik et al., 1998; Gibler, 2008;
Demirel-Pegg and Moskowitz, 2009; Gibler and Miller, 2012). When military assistance
is considered, the same logic may also apply. Unlike large and wealthy economies, small
and poor economies have extremely limited resources to meet their security needs. Hence,
they have a strong desire to offer policy concessions in exchange for military assistance.
Population is another often-included determinant of U.S. foreign assistance (Neumayer,
2003; Bueno de Mesquita and Smith, 2007; Demirel-Pegg and Moskowitz, 2009). A
couple of studies have suggested that U.S. economic assistance is biased in favor of
populous economies, which contradicts what we have learned from the comparative aid
literature showing systematic bias against them. The security implications of population
can further complicate the issue of military assistance. According to Dunne and Perlo-
Freeman (2003), a larger population by itself provides a certain level of security because
populous countries might rely on a large military force as a substitute for prohibitive
weapon systems with cutting-edge technology. If that is the case, countries with a large
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populace have considerably less demand for foreign military assistance and lack the
incentive to make policy concessions in exchange.
Next, imports from the U.S. is included because it has long been argued that precious
foreign markets constitute a major strategic interest that U.S. policymakers need to serve.
Some empirical studies have also shown systematic evidence that the U.S. provides more
economic (Neumayer, 2003; Bueno de Mesquita and Smith, 2007; Fleck and Kilby, 2010)
and military assistance (Poe and Meernik, 1995) to its major export markets.
Lastly, I include the inflow of U.S. economic assistance in this category because
studies have shown a strong positive connection between the two types of aid (Hook,
1995; Neumayer, 2003).
The political-strategic group includes voting consistency with the U.S. in the United
Nations General Assembly (UNGA), U.S. military presence, the level of democracy,
violation of citizens’ personal integrity, geographical location and the war on terrorism.
First, some studies have identified votes in the UNGA as a major form of policy
concession that developing countries make in exchange for U.S. economic assistance
(Rai, 1980; Wang, 1999; Dreher, 2008). Thus, an aid-recipient country’s voting
consistency with the U.S. in the UNGA is included to control for this possibility.
Second, some studies have examined the relationship between U.S. military presence
and the volume of U.S. economic aid (Meernik et al., 1998; Apodaca and Stohl, 1999).
Little evidence has been found in support of a significant connection between the two.
Given the solid logical tie between U.S. military presence and military aid, however, I
still include a variable of U.S. military presence to account for a potential nexus.
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Third, an extensive empirical literature has investigated the relationship between
respect for human rights by the governments of aid-recipient countries and inflows of U.S.
foreign aid. The scholarship could be further divided into two strands of research. The
first focuses on the respect for political rights or the level of democracy (Demirel-Pegg
and Moskowitz, 2009; Fleck and Kilby, 2010; Gibler and Miller, 2012; Meernik et al.,
1998), while the second focuses on the abuse of citizens’ personal integrity (Poe, 1991;
Lai, 2003; Neumayer, 2003; Gibler, 2008; Fariss, 2010). This study takes both political
rights and personal integrity abuse into account.
Next, studies on U.S. foreign aid have long noticed the strategic significance of aid-
recipient countries due to their geographical location. Although previous studies paid
particular attention to American countries (Apodaca and Stohl, 1999; Poe and Meernik,
1995), it should be noted that countries in other regions could also be of unique value to
U.S. foreign policy (Balla and Reinhardt, 2008). Thus, the current study takes
geographical location into account when predicting the baseline volume of U.S. military
aid.
Finally, the terrorist attacks of Setp. 11, 2011 have raised academic interest in
exploring how the war on terrorism has reshaped U.S. foreign and security policies.
Regarding foreign assistance, recent studies show that the post-9/11 era has been
characterized by an expansion of U.S. foreign assistance in order to contain the ongoing
terrorist threat to U.S. security (Fleck and Kilby, 2010; Boutton and Carter, 2013). Given
the epoch-making nature of the Sept. 11 attacks and their evident impact on U.S. foreign
and security interests, this research addresses that concern as well.
3. Data and Variables
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To examine the effect of bargaining power on post-Cold War U.S. military assistance,
I constructed a data sample for the period 1992-2011. Table 1 provides the descriptive
statistics. Data on U.S. military assistance is collected from U.S. Overseas Loans and
Grants, which is popularly known as the Greenbook (USAID, 2012). The volume is
converted to 2005 U.S. dollars.
[Table 1 Here]
The proposed socioeconomic determinants of U.S. military assistance are collected and
operated as follows. The national income and income per capita of aid-recipient countries
are measured by GDP and GDP per capita, respectively. The data are obtained from the
World Development Indicators (WDI) of the World Bank (2012) and converted to 2005
U.S. dollars. The population of aid-recipient countries is also from the WDI. Next, I use
imports from the U.S. in 2005 dollars to gauge the significance of the recipient as a
foreign market. The data are adopted from the Direction of Trade Statistics of the
International Monetary Fund (2012). Finally, U.S. economic assistance is also included in
the socioeconomic group to predict the baseline level of military assistance. The data are
again from the Greenbook and in 2005 U.S. dollars. To control for the impact of extreme
values, all of the variables mentioned above are log-transformed.
The proposed political-strategic determinants of U.S. military assistance are operated
as follows. First, voting consistency with the U.S. in the UNGA is provided by Strezhnev
and Voeten (2013). Specifically, the variable of agree3un is used. It ranges from 0 to 1,
with a higher value indicating a higher level of voting consistency. Second, U.S. military
presence is measured by the number of U.S. military personnel stationed in the aid-
recipient country. The data are taken from Active Duty Military Personal Strengths by
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Regional Area and by Country, which is produced by the Defense Manpower Data Center
(U.S. Department of Defense, 2012). In order to control for the effect of extreme values,
this variable is also log-transformed. When no U.S. military personnel are stationed in a
country, value of one is used to deal with the problem of log zero. Third, the standard 21-
point polity score (Marshall and Jaggers, 2009) is employed to measure the level of
democracy or the political-right dimension of human rights in aid-recipient countries.
Fourth, the abuse of personal integrity is coded according to the Political Terror Scale
(PTS) by Wood and Gibney (2010). Following Mayer and Zignago (2011), aid recipients
are categorized into one of five continental groups. They are Africa, America, Asia,
Europe, and the Pacific. The African group serves as the benchmark for comparison and
is omitted in empirical estimation. Finally, a single dummy variable is used to control for
the impact of the U.S. war on terrorism. A value of one is given to this variable for all
observations after 2001. Otherwise, the variable is coded as zero.
4. Empirical Findings
4.1 Benchmark Results
To examine the effect of bargaining power on U.S. military assistance in the post-Cold
War era, I first take a benchmark analysis that involves two different specifications. The
first includes only the recipient characteristics proposed to influence the baseline volume
of U.S. military aid. This specification is estimated with ordinary least square (Model 1a)
and maximum likelihood (Model 1b), respectively. The second specification takes into
account the bargaining effect by operating the two-tiered SFA developed in Section 2.2.
In particular, two variants of the two-tiered SFA are applied. The first (Model 2a)
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operates hypothesis testing based on regular standard error, while the second (Model 2b)
operates it based on robust standard error. Table 2 reports the results.
[Table 2 Here]
The two model specifications reach the same conclusion regarding how the proposed
attributes of an aid-recipient country influence the baseline volume of U.S. military aid.
As for the socioeconomic attributes, GDP, imports from the U.S. and inflow of U.S.
economic assistance have a positive effect on baseline military aid, while GDP per capita
and population have had a negative effect during the post-Cold War era. It is interesting
to note that the result for the population-aid nexus is consistent with what we have
learned from the comparative literature of aid and the Dunne and Perlo-Freeman (2003)
argument that population itself can provide a certain level of security.
Interesting results also appear concerning the political-strategic attributes. First, higher
voting consistency with the U.S. in the UNGA and a larger contingent of U.S. military
personnel help a recipient gain more military aid. Second, the results also suggest that
U.S. military aid is indiscriminate regarding a recipient’s level of democracy (respect for
citizens’ political rights) but biased in favor of those that regularly abuse the personal
integrity of their citizens. Finally, the U.S. provides more military assistance in the war
on terrorism, and countries in Asia and Europe received more U.S. military aid.
The main objective of this research, however, is to evaluate the impact of bargaining
power on the distribution of U.S. military assistance. According to the estimates of
Models 2a and 2b, both
u
and
w
are statistically significant at the 0.01 level. Since
Model 1b is nested in Model 2a, we can use a likelihood ratio (LR) test to evaluate
whether a more complicated specification is preferable. The chi-squared value of 32.98 is
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highly significant and thus supports the inclusion of additional parameters modeling the
bargaining effect.
To illustrate the overall contribution of the bargaining effect to the variation in U.S.
military assistance, I operate a variance-decomposition analysis based on the two-tiered
SFA specification. Table 3 presents the results. According to this analysis, the overall
unexplained variation in U.S. military assistance is 3.32. Of this unexplained part, 93%
can be explained by the bargaining effect. Within the bargaining-related variation, 46%
can be further attributed to the bargaining effort of aid-recipient countries to push up the
amount of aid. In comparison, the other 54% can be attributed to the bargaining effort of
the donor U.S. to push it down. The figures suggest a significant bargaining effect on the
distribution of post-Cold War U.S. military assistance.
[Table 3 Here]
To complete the discussion, I provide the mean and quartile values of the bargaining
effect of the donor U.S., that of its military aid recipients and the net surplus in Table 4.
They are calculated based on the point predictors introduced in Equations (4) through (6),
respectively. The results indicate that on average the bargaining effort of the donor U.S
decreases the volume of military assistance by 56.07%. In comparison, the bargaining
effort of aid-recipient countries increases it by 54.47%. In equilibrium, the volume of U.S.
military assistance is lower than the baseline volume by 1.60% at the mean and by 2.73%
at the median. Obviously, the donor U.S. extracts a slightly larger portion of the
transaction surplus at these central points.
[Table 4 Here]
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However, the game of surplus division is not always about equally strong hagglers as it
may first appear. In fact, the quartile values show substantial variance in bargaining
performance and hence the final outcome of surplus division across transactions. As
reported in the last row of Table 4, the net surplus at the first quartile point is -30.72%.
This means that for a quarter of the aid-for-policy transactions in our data sample, the
policy concessions made by aid-recipient countries were traded for at least 30.72% less
than their baseline price. At the same time, the net surplus at the third quartile point is
27.88%, meaning that for another quarter of transactions, policy concessions were traded
for at least 27.88% more than their baseline price. The inter-quartile variance (the
difference between the first and third quartile values) is 58.60%, demonstrating the
massive influence of bargaining power over the allocation of U.S. military assistance.
4.2 An Extended Model
The two-tiered SFA analysis in Section 4.1 assumes bargaining efficiency to be
homogenous among aid recipients. A more realistic scenario, however, would allow it to
be heterogeneous across different recipients. Previous studies in the two-tiered SFA
literature have addressed this issue by allowing seller and buyer attributes to influence the
means of
w
and
u
, respectively (Groot and Maassen van den Brink, 2007; Kumbhakar
and Parmeter, 2010; Murphy and Strobl, 2008; Tomini et al., 2012). Using the same
approach, I now allow aid-recipient attributes to influence the mean of
w
. In particular,
w
is now assumed to be a linear function of all the recipient characteristics studied in
the benchmark analysis except the regional dummies.
[Table 5 Here]
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Results based on this extended model are provided in Table 5. For the sake of
comparison, findings based on Model 2b are duplicated here. Several interesting patterns
are identified and worth discussing in detail. As far as socioeconomic attributes are
concerned, only imports from the U.S. are shown to have a significant effect on the
bargaining capability of an aid-recipient country. Specifically, importing more from the
U.S. not only promotes the baseline level of military assistance but also grants the
importer bargaining advantage in surplus division. The other socioeconomic attributes
show no significant effect on the bargaining capability of an aid-recipient country, and
their influence over the baseline military aid is similar to those identified in the
benchmark analysis. The results demonstrate that U.S. economic aid inflows, population,
GDP and GDP per capita of an aid-recipient country affect U.S. military assistance only
by determining the baseline aid.
Regarding the political-strategic attributes of an aid recipient, the accommodation of
heterogeneity in bargaining efficiency provides a complicated picture of the channels
through which such characteristics influence U.S. military assistance in equilibrium. All
political-strategic attributes except the voting consistency with the U.S. in the UNGA and
war on terrorism show a significant impact on an aid recipient’s bargaining capability.
Specifically, personal integrity abuse and U.S. military presence increase bargaining
capability. However, a higher level of democracy (or higher respect for citizens’ political
rights) decreases it.
Allowing bargaining efficiency to vary across aid recipients also has considerable
consequences for determining the baseline level of military assistance. Once the cross-
recipient difference in bargaining efficiency is assumed, U.S. military presence and the
18
war on terrorism lose their significance. At the same time, democracy gains importance
in determining the baseline level of U.S. military aid. Violation of personal integrity is
still a significant determinant of baseline aid but switches its coefficient sign from
positive to negative.
From such changes, essential lessons can be drawn concerning how the political-
strategic attributes of an aid-recipient country influence the U.S. military assistance it
receives through two different channels. In particular, recipient attributes can affect either
the portion of the transaction surplus grabbed by aid-recipient countries or the value of
foreign policy concessions made to the U.S. as reflected in the baseline level of assistance.
According to the extended model, countries that regularly abuse the personal integrity of
their citizens provide less valuable policy concessions, as reflected in the lower baseline
level of aid. However, this disadvantage is largely compensated by their strong capability
in negotiating deals with the U.S. On the other hand, more democratic states provide
more valuable foreign policy concessions and earn more military assistance as reflected
in the baseline volume. The advantage, however, can be negated by their considerable
bargaining inefficiency. Finally, unlike what we learned from the benchmark results, the
war on terrorism has no impact on military assistance through either mechanism once
difference in bargaining capability is considered.
[Table 6 Here]
Does the accommodation of heterogeneity in bargaining efficiency affect our
evaluation of the overall contribution of the bargaining effect to the variation in U.S.
military assistance? To answer this, I operate a variance decomposition analysis for the
extended model and report the results in Table 6. The overall unexplained variation in
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U.S. military assistance is now 3.08. Of this unexplained variation, 86% can still be
attributed to the bargaining effect. Within the bargaining-related variation, 48% can be
further attributed to the bargaining effort of the recipient countries to push up the amount
of U.S. military aid, while the other 52% can be attributed to the bargaining effort of the
donor U.S. to push it down. Compared with the benchmark results, the overall
explanatory ability of the bargaining effect has decreased from 93% to 86% after taking
cross-recipient heterogeneity in bargaining efficiency into account. The relative impacts
of recipient and donor bargaining efforts in the extended model are close to those
reported in the benchmark analysis.
Next, I inspect the mean and quartile values of the bargaining effect of the donor U.S.,
that of its military aid recipients and the net surplus based on the extended model. The
results presented in Table 7 show that on average, the bargaining effort of the donor U.S.
decreases the amount of military aid by 53.84%, while the bargaining efforts of recipient
countries increase it by 49.46%. As a result, U.S. military assistance in equilibrium is
4.38% lower than the baseline level at the mean and 5.99% lower at the median. The
quartile values again show colossal variation in bargaining performance on both the
donor and recipient sides as well as in the net surplus. The net surplus at the first quartile
point shows that for a quarter of the aid-for-policy transactions, policy concessions are
traded for at least 32.25% less than their baseline price. At the same time, the net surplus
at the third quartile point shows that for another quarter of transactions, policy
concessions are traded for at least 20.91% more than their baseline price. The inter-
quartile range of 53.16% illustrates the massive impact of bargaining power and its
substantial variation across transactions.
20
[Table 7 Here]
A quick comparison with the results from our benchmark analysis (Table 4)
immediately reveals three noticeable differences. First, ignoring cross-recipient
heterogeneity in bargaining efficiency is likely to overstate the overall impact of
bargaining power on U.S. military assistance, a point that holds at both the mean and
different quartile points. Second, the bargaining advantage of the donor U.S. in the
surplus division is underestimated in the benchmark analysis. Third, assuming the same
bargaining efficiency across recipients exaggerates the variance in bargaining
performance, which is best reflected by the interquartile ranges.
Despite these differences, it is critical to note that the extended model unequivocally
reconfirmed two general themes established in our benchmark analysis. First, the U.S.
enjoys a modicum of bargaining advantage at both the mean and the median. In other
words, it can grab a larger portion of the transaction surplus at those central points.
Second, policy concessions are not always traded under their baseline price. Though
many aid recipients ended up with highly unfavorable deals with the U.S., many others
managed to strike highly favorable ones.
[Table 8 Here]
Some curious readers might then be interested in knowing more about the bargaining
performance of individual aid recipients. Before moving to the final section, Table 8
shows the ten most successful ones in terms of average bargaining performance (out of
133 aid-recipient countries). All of these countries are long-term beneficiaries of U.S.
military assistance. It is also interesting to note that countries from the Middle East and
North Africa dominate the list.
21
5. Conclusion
Conceptualizing U.S. military assistance as the outcome of aid-for-policy transactions
brings the effect of bargaining power on the allocation of U.S. military aid immediately
to light. This study provides a two-tiered SFA that is able to examine the impact of
bargaining power on U.S. military aid. By looking at the distribution of U.S. military
assistance during the post-Cold War era, I find that the bargaining effect accounts for a
considerable variation in U.S. military assistance. Empirical results also show that aid-
recipient countries vary substantially in bargaining efficiency, although the donor U.S.,
both on average and at the median, enjoys a modicum of bargaining advantage. In
addition, critical behavioral patterns concerning how different attributes of an aid-
recipient country influence the amount of U.S. military assistance it receives have been
identified and discussed.
As one of the first to address the nexus between bargaining power and U.S. military
assistance, this study also leaves questions for future academic inquiry. I believe one of
them is incredibly demanding and promising. That is to develop new theories accounting
for the variation in bargaining efficiency across aid-recipient countries.
The well-developed theoretical literature on why and how certain socioeconomic or
political-strategic attributes affect the bargaining capability of aid-recipient countries
would tremendously benefit our understanding of the bargaining-aid nexus in a couple of
important ways. First, it would help explain some empirical patterns identified in the
current research, which lack a clear theoretical account. For instance, why do countries
that regularly abuse the personal integrity of their citizens have more bargaining
capability while democratic regimes are pretty inefficient in negotiating favorable deals
22
of military assistance with the U.S.? In particular, what is the exact institutional or
informational mechanism that gives rise to these differences?
Second, the current research was forced to put traditional determinants of U.S. foreign
aid in both equations of
()x
and
w
due to the shortage of theories on bargaining
efficiency. Such a practice did provide fruitful results. However, other determinants of
bargaining efficiency might have been omitted, for they do not obviously affect the
baseline level of U.S. military assistance. Well-built theories on the determination of
bargaining efficiency would propose new attributes of aid-recipient countries that affect
the amount of U.S. military assistance only through the bargaining mechanism.
23
Table 1: Descriptive Statistics
Variable
Mean
S.D.
Minimum
Maximum
Ln(military_aid)
14.378
2.339
7.734
22.316
Ln(economic_aid)
16.853
2.213
5.809
22.129
Ln(population)
16.250
1.439
12.985
21.019
Ln(GDP)
23.732
1.829
19.844
29.179
Ln(GDP_PC)
7.482
1.277
4.816
10.760
Ln(import)
19.748
2.185
13.502
26.065
U.N. Voting
0.329
0.144
0
0.941
Personal Integrity
Abuse
2.708
1.055
1
5
Democracy
3.793
5.754
-10
10
Ln(Manpower)
2.767
1.781
0
11.474
Terror
0.554
0.497
0
1
Rg1: Africa
0.333
0.471
0
1
Rg2: America
0.232
0.422
0
1
Rg3: Asia
0.241
0.428
0
1
Rg4: Europe
0.182
0.386
0
1
Rg5: Pacific
0.011
0.105
0
1
24
Table 2: Regression Results (Benchmark)
Model 1a
OLS (S.E.)
Model 1b
MLE(S.E.)
Model 2a
TTSFA(S.E.)
Model2b
TTSFA(R.S.E.)
Ln(economic_aid)
0.52***(0.03)
0.51***(0.03)
0.51***(0.03)
0.51***(0.04)
Ln(population)
-20.44***(2.55)
-21.71***(2.38)
-21.62***(2.52)
-21.62***(3.16)
Ln(GDP)
20.08***(2.54)
21.38***(2.38)
21.30***(2.52)
21.30***(3.16)
Ln(GDP_PC)
-19.72***(2.55)
-20.93***(2.39)
-20.82***(2.53)
-20.82***(3.18)
Ln(import)
0.23***(0.05)
0.24***(0.05)
0.24***(0.05)
0.24***(0.05)
U.N. Voting
1.04**(0.49)
1.75***(0.45)
1.82***(0.48)
1.82***(0.64)
Personal Integrity
Abuse
0.18***(0.05)
0.11**(0.05)
0.08*(0.05)
0.08*(0.05)
Democracy
-0.01(0.01)
-0.01(0.01)
-0.001(0.01)
-0.001(0.01)
Ln(Manpower)
0.17***(0.03)
0.21***(0.03)
0.21***(0.03)
0.21***(0.04)
Terror
0.21*(0.11)
0.34***(0.10)
0.32***(0.10)
0.32**(0.13)
Rg2: America
-0.09(0.17)
-0.22(0.15)
-0.28*(0.16)
-0.28(0.19)
Rg3: Asia
0.91***(0.13)
0.97***(0.11)
1.05***(0.11)
1.05***(0.13)
Rg4: Europe
0.94***(0.20)
0.80***(0.18)
0.82***(0.18)
0.82***(0.22)
Rg5: Pacific
0.13(0.43)
0.35(0.36)
0.38(0.34)
0.38(0.32)
v
0.49***(0.14)
0.49***(0.15)
u
1.29***(0.22)
1.29***(0.25)
w
1.19***(0.35)
1.19***(0.35)
LR Test
32.98***
Observations
1789
1789
1789
1789
*p<0.1 **p<0.05 ***p<0.01
25
Table 3: Decomposition (Benchmark)
222
v u w
++
3.32
( ) ( )
22 222
/
u w v u w
+ + +
0.93
( )
2 2 2
/
u u w
+
0.54
( )
2 2 2
/
w u w
+
0.46
26
Table 4: Distribution of Bargaining Power (Benchmark)
Mean
Q1
(%)
Median
(%)
Q3
(%)
Q3-Q1
(%)
Donor U.S.
( )
ˆ1|
u
Ee
−
−
56.07
38.80
47.56
69.32
30.52
Recipients
( )
ˆ1|
w
Ee
−
−
54.47
38.60
44.84
66.68
28.08
Net Surplus
( )
ˆ|
uw
E e e
−−
−
-1.60
-30.72
-2.73
27.88
58.60
27
Table 5: An Extended Model
Model2b
TTSFA
Model 3
Extended
()x
Model 3
Extended
w
Ln(economic_aid)
0.51***(0.04)
0.41***(0.04)
0.01(0.03)
Ln(population)
-21.60***(3.16)
-24.10***(2.37)
1.82(2.72)
Ln(GDP)
21.30***(3.16)
23.88***(2.37)
-1.85(2.72)
Ln(GDP_PC)
-20.80***(3.18)
-23.56***(2.38)
1.87(2.72)
Ln(import)
0.24***(0.05)
0.17***(0.05)
0.10**(0.05)
U.N. Voting
1.82***(0.64)
0.66(0.7)
0.68(0.43)
Personal Integrity
Abuse
0.08*(0.05)
-0.15**(0.06)
0.23***(0.05)
Democracy
-0.001(0.01)
0.04***(0.01)
-0.06***(0.01)
Ln(Manpower)
0.21***(0.04)
0.06(0.04)
0.13***(0.03)
Terror
0.32**(0.13)
0.15(0.14)
0.15(0.12)
Rg2: America
-0.28(0.19)
0.04(0.16)
Rg3: Asia
1.05***(0.13)
1.16***(0.11)
Rg4: Europe
0.82***(0.22)
1.35***(0.21)
Rg5: Pacific
0.38(0.32)
0.24(0.29)
v
0.49***(0.15)
0.65***(0.26)
u
1.29***(0.25)
1.18***(0.41)
w
1.19***(0.35)
Observations
1789
1789
1789
*p<0.1 **p<0.05 ***p<0.01
28
Table 6: Decomposition (Extended)
222
v u w
++
3.08
( ) ( )
22 222
/
u w v u w
+ + +
0.86
( )
2 2 2
/
u u w
+
0.52
( )
2 2 2
/
w u w
+
0.48
29
Table 7: Distribution of Bargaining Power (Extended)
Mean
Q1
(%)
Median
(%)
Q3
(%)
Q3-Q1
(%)
Donor U.S.
( )
ˆ1|
u
Ee
−
−
53.84
40.02
46.98
65.25
25.23
Recipients
( )
ˆ1|
w
Ee
−
−
49.46
33.74
42.01
59.35
25.61
Net Surplus
( )
ˆ|
uw
E e e
−−
−
-4.38
-32.25
-5.99
20.91
53.16
30
Table 8: Top Ten Successful Bargainers (1992-2011)
Rank
Country
Average Net Surplus
1
Liberia
58.67
2
Tunisia
56.39
3
Israel
53.33
4
Colombia
53.08
5
Egypt
52.76
6
Morocco
50.32
7
Jordan
50.01
8
Iraq
48.22
9
Bahrain
43.41
10
Pakistan
39.58
31
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