Theocracy and Resilience Against Economic Sanctions
Alireza Naghaviy, Giuseppe Pignataroz
December 2014

Abstract
This paper provides a simply theory to explain the impact of sanctions on a regime’s policies
and behavior. Sanctions are generally put to strip the target country from its available rents andweaken the government’s stance against growing discontent in the population. We show howeverthat sanctions may give legitimacy to an incumbent government by in‡uencing the optimal level ofreligious ideology provided by the state and further stabilizing its grip to power and rents. While ina good state of nature sanctions build resilience as long as religious ideology among the populationis strong, at bad times they compel the target country to move towards ideological moderation.
In a world of asymmetric information, the target country always …nds it optimal to send a signalthat truly represents the prevailing state of nature in order to induce learning and reach a win-win
outcome.
Keywords: Religion, Sanctions, Theocracy, Resilience, Bayesian learning.
JEL classi…cation Numbers: H10, Z12, P48, D74, D83.
We are grateful to two anonymous referees for guiding us with valuable comments that substantially helped in improving the paper. We would also like to thank Mohammad Reza Farzanegan, Evelyn Korn, Florian Schuett, and theparticipants at the international symposium on "Sanctions and the Iranian Political Economy: Lessons and the Ways
Forward" for valuable discussion and comments.
y University of Bologna.
Department of Economics, Piazza Scaravilli 2, 40126 Bologna, Italy, E-mail:alireza.naghavi@unibo.it
z University of Bologna.
Department of Economics, Strada Maggiore 45, 40125 Bologna, Italy, E-mail:giuseppe.pignataro@unibo.it.

11

Introduction

Economic sanctions are becoming a routine policy instrument in international politics these days andtend to show up on the news on daily basis in an international scale. Sanctions often take place against
extremist policies by target states. This could for example involve the violation of human rights, development of nuclear weapons, invasion of a recognized state, the use of expropriation and violence
to retain power, or ideological extremism. As some examples of the latter Wintrobe (2006) mentions
communism (control over the means of production), nationalism (control over territory) and religious
fundamentalism (ridding the nation of foreign and secular in‡uences). Extremist behavior can generally
be associated with authoritarian regimes, against which sanctions have not have an impressive recordin achieving their outcome. Empirical studies have linked this to the lack of prospects of reelection
and therefore motivation by autocrats to please domestic constituencies (Nooruddin, 2002), lower destabilizing force of sanctions due to the low risk of removal faced by autocrats (Marinov, 2005), and lesslikelihood of political violence and protests occurring as a cause of sanctions in autocracies (Allen, 2008).
But can ideology be used by the ruling regime in the target country to defy sanctions? When is theappropriate moment to impose a sanction or to remove an existing one?
This research provides a theory to explain the impact of sanctions on a regime’s policies andbehavior. It introduces a simple model to explain how an ideology such as religious beliefs can be
employed in the target country as a tool of resilience to adapt to the new realities. Our model isinspired by a recent line of literature, namely Carvalho (2013), Coşgel and Miceli (2013) and Johnson
and Koyama (2013), who study di¤erent aspects of enforcement of religious laws by the state. We showthat in‡icting religious laws or bestowing religious goods and services allows a theocracy to adjust to
the economic hardship caused by sanctions and provides the option of ignoring sanctions. This is only
possible when a su¢ ciently large fraction of the population derives utility from religion or if religious
beliefs in that segment of the society are su¢ ciently strong. The state …nds an optimal level of religious
ideology to provide to the society in order to establish a new equilibrium. In principle, sanctions are
put to strip the country from its available resource rents giving more weight to taxes as a secondary
government source of income. As in Coşgel and Miceli (2009), the state obtains more legitimacy to tax
the population by incorporating religion into the constitution, i.e. theocracy. Here, providing religion
to the religious fraction of the society allows the state to make up for losses brought about by decreased
exports or devaluation of their natural resources.
In the spirit of Acemoglu, et al. (2001), we highlight the division between groups in the society
with di¤erent preferences through an episode of con‡ict that determines the optimal tax regime. The
government uses tax revenues to provide religious goods and services. The population is divided into twogroups: the materialists and the religious. The materialists are averse to taxes as they do not bene…tfrom religious beliefs, whereas the religious defend taxes as they also enjoy ideological non-pecuniary0gains ful…lled through a religious state. The capacity of imposing the preferred policy is determined bytheir de facto power, where the more powerful group implements its preferred policy. One novel featureof the confrontation is that unlike a rebellion against the state, one group loyal to the government
principles defends the tax policy, whereas an opposition materialistic group disputes to have the taxes
abolished. The intended side-e¤ect of sanctions is to reduce national welfare. This could cause a risein popular discontent and push the outcome of contest between the two sides of the population against
the interests of the regime. We show however that ideological beliefs such as religion in a country canempower the leader by conveying legitimacy to the state. It allows them to raise tax collection as
response to sanctions by carving religious ideology into their constitution more …rmly. The incumbent
must keep the loyal group content to serve as a shield to protect the government’s political position.
The degree to which religion can be used as an instrument of resilience against sanctions depends
on an exogenous economic state observed at the beginning of each period. When the state of nature issuch that the rents and income are more vulnerable to sanctions, the incumbent may …nd it optimal tomoderate its stance on the policy under question. Alternatively, in better economic conditions religious
conservatism can be used to defy sanctions. Although the sender does not have perfect information
regarding the state of nature and therefore the magnitude of the economic impact of sanctions, it
can use the behavior of the government as a signal. Namely, a move towards religious moderation isperceived as a toning down of the target’s stance, whereas a more zealous bond between religion and thestate instead sends a signal of resilience.1 The quality of the received signal plays a crucial role in thedecision whether to impose or lift sanctions.2 In the presence of a highly accurate signal of compliance,
lifting sanctions results in a win-win solution. Likewise, an accurate signal of resilience through the useof ideological conservatism as a remedy justi…es the appropriateness of sanctions. Instead, when thepolitical message conveyed through the signal is weak, the willingness to cooperate is not su¢ cient topersuade the sender as past information about the economy rules its decision.
Our theory can be put in the context of existing theories that explain the phenomenon of international sanctions. The public choice literature suggests that sanctions work through their impact on therelative political e¤ectiveness of interest groups within the target country (Kaempfer and Lowenberg,1988). By either diminishing or enhancing the political resources of key groups in the target country,
sanctions can alter the alignment of domestic interests and thereby generate a change in policy. In ourframework, it is religious beliefs that de…ne the identity of di¤erent interest groups and the politicalcleavage through which sanctions alter the socio-political equilibrium. Moving to the paradoxical conclusions of Drezner (1999)’s con‡ict expectation model, sanctions are more likely to be imposed against
targets with a high expectation for future con‡ict, which are precisely the states that are less likely toconcede. In our framework sanctions are imposed on countries that signal non-cooperative behavior,
1 Levy and Razin (2012) investigate the role of theology and the in‡uence of religious organizations on beliefs in society.
2 See Levy and Razin (2014).

1

which are precisely the states resilient against sanctions. Finally, in a world of perfect information, asanction would never be implemented. If it is deemed e¤ective the threat translates into immediate
compliance by the target, and if ine¤ective then sanctions would never be threatened in the …rst place(Eaton and Engers, 1999). Our theory contributes to the three branches by bringing together the reaction of an ideologue regime to international sanctions in an environment of con‡icting interests within
the society and the implications for negotiation e¤orts by both sides in a world of imperfect information
with learning.
In the next section we …rst introduce the case of Iran as a current example that motivates thestudy of a possible link between religion and sanctions. Section 3 presents the basics of our model.
In Section 4, we solve the internal equilibrium to study the optimal reaction of the target country
upon sanctions. The government takes into account the composition of the population with respect
to their religious beliefs and loyalty to the system. An analysis of the problem of the sender follows
in Section 5 to see how the imposition of sanctions and increased ties between religion and the state
reinforce each other. We further …nd the equilibrium under which compliance (resilience) is followed bylifting (imposing) sanctions. The conclusion discusses robustness and generalizability of the model in
relationship to other case studies and explain the importance of religion compared to other ideologies
as a tool of resilience against sanctions.

2

The Case of Iran

Iran is a nation under the spotlight these days for its renewed negotiation e¤orts with the West regarding
its nuclear program. The aim is to lift the existing economic sanctions, which are not a new phenomenon
to the Iranian government and population. Since the 1979 revolution, di¤erent types of sanctions havebeen put to force in order to change the Islamic republic’s hostile position towards the West. The
sanctions were tightened by the US and increasingly supported by the rest of the world in 2012 leading
to a change in the turn of events after Iran’s 2013 elections. Iran’s geographically strategic position in
the Persian gulf makes it a crucial player as the region holds the largest share of the world’s oil and gas
reserves. The same position makes Iran, at least theoretically, more vulnerable to any type of sanctions.
Iran is a rentier state which almost fully relies on oil to run its economy.3
Nevertheless, sanctions have not only fallen short of achieving their goals in the case of Iran,but have instead bolstered the regime by further stabilizing their roots and empowering their policies.
The most plausible instrument in the hands of the Islamic republic is exactly what the name suggests:
religious ideology which unites the government and the religious fraction of the population in keeping theconcept of religion in the state. Our model can be used to explain that as long as the ideology is strong
among the population, sanctions fail. This is in line with Hakimian (2012) stating that ideologue regimes
3 See Bjorvatn and Selvik (2008) and Bjorvatn, Farzanegan and Schneider (2013) for analyses of political competition
and rent-seeking within the system for the speci…c case of Iran.

2

like Iran tend to have a high pain threshold and may be willing to take a big hit against their population
without yielding their international stance. Only upon extreme economic hardship a government may
be obliged to alter its behavior. For example, worldwide sanctions against Iran had a surprising and
immediate success after the expansive EU sanctions came into e¤ect in July 2013. A policy of threats
has since been replaced by a policy of smiles in order to signal the nation’s sincerity towards cooperation.
Can this be by chance, or can the logic be explained by an arithmetic interaction between the West,the state of Iran, and the population? According to president Rouhani, “international politics is nolonger a zero-sum game but a multi-dimensional arena where cooperation and competition often occur
simultaneously” (Rouhani, 2013).
Iran can in‡uence the perception of the rest of the world by its actions. The economic and…nancial environment in Iran have had an ambiguous character as the relevant …gures are at times notreported to international organizations or even within the country. The West must therefore evaluate
the circumstances through signals sent from Iran’s part. A clear form of a signal of moderation canbe deduced from the President in power. Other forms of signal are the choice of the negotiation team,their foreign policy during the negotiations (or English pro…ciency), and the degree of conservatism ininternal policies. The recently elected president of Iran, with a relatively more moderate approach thanhis predecessor, has announced that he has carte blanche regarding the diplomacy with the West toreach a solution with the aim to dissolve the existing sanctions. President Rouhani’s carte blanche, forexample, serves as a signal of a softening trend in Iran’s stance in the negotiations. These initiatives
are designed to build a certain degree of trust, and could be viewed positively by the rest of the world
depending on the accuracy of the signal. Lifting sanctions in a framework of asymmetric information
may therefore occur if Iran’s signal succeeds in switching the policy of the West.

3

Model

This section introduces the basics of a general model of sanctions, where the world consists of a target
country, composed of citizens and an incumbent government, plus the imposing country, to which werefer to as the sender hereafter. As a result of a disagreement between the two sides, the sender is in
the position to put potential sanctions on the target country to create hardship and force the regime
to cave into pressure and change behavior. The goal of economic sanctions is in general thought to be
to achieve an objective by means of reducing government rents, as well as the standards of living inorder to provoke rebellion or social implosion by creating discontent among the population. This canbe achieved for instance through a reduced (limited) exports of natural resources (oil), a devaluation of
the currency, increased in‡ation, or the unavailability of certain consumption goods (Farzanegan, 2013).
Time is discrete and in…nite, indexed by t

1. At time t, there exist two possible exogenous

states of nature xt 2 f0; 1g that govern the magnitude of the economic impact of sanctions, which in3

essence determine the intentions of the target country whether or not to comply. In a bad economic
state of nature, xt = 0, costs of conceding is lower than the potential damages from sanctions, whereas
the opposite holds for xt = 1. On reasonable ground, only the target country has perfect access tothis information. The sender instead speculates the state of nature by observing the persistency ofthe phenomenon,

i , assumed for simplicity to be Markovian and dependent of the current state, i.e.,Pr(xt = ijxt 1 = i) =4
i.

A policy decision st 2 St on whether or not to impose a sanction is taken by the sender at timet 2 f1; :::; T g. We limit the analysis to the case where the option is binary, i.e. St 2 f0; 1g. The utility
derived by the sender from the implementation of a sanction is assumed to be state-dependent so thatthe policy action st = 1 is preferred in state of the world xt = 1, while the opposite st = 0 is true forthe state xt = 0. Since the sender cannot fully perceive the potential e¤ect of sanctions, its preferences
can be represented by the following von Neumann-Morgenstern utility function:

W (st ; xt ) ()8>
<1 if st = xt ,>:0 otherwise.

(1)

The utility function in (1) captures the loss brought about by a wrong decision or symmetrically thevalue of a correct decision. The main objective is thus to implement the appropriate policy in termsof sanctions which amounts to guessing the target country’s intentions to cooperate. This could, forexample, apply to a resolution of a stand-o¤ being good for the whole world (st = 0, xt = 0), or awalk-out by the target country from any potential negotiation followed by activities potentially harmful
for the world even if this was not its original intentions (st = 1, xt = 0). In addition, implementing
sanctions (st = 1) entails a cost, c 2 [0; 1], to the imposing side. This could for instance re‡ect reduced
trade or high prices of natural resources (oil) as a result of reduced access precisely due to sanctions(Farmer, 2000).
Following Coşgel and Miceli (2009), we characterize the role of ideology by focusing on theprovision of religion by the state. We extend their framework to a political economy setting by dividing
the society into two segments, the materialistic type A and the religious type B, comprising a fraction
1

andof the total population (normalized to one) respectively. Type A only derives utility fromcomposite consumption C, whereas the utility of type B also contains a non-pecuniary component towhich we refer to as religious ideology. This group supports and gains from the supply of religious laws,
goods and services

by the government. The utility of a representative agent in each group at time t istherefore given by:
UtA = Ct ;UtB = Ct + u( t );4 We assume a positive initial probability Prfx

1 = ig =of starting in one state of nature or the other.

4(2)

where u0 > 0, u00 < 0. The utility of the religious group is increasing in the fact that their (religious)
ideology is backed by the government. Each citizen is endowed with wealth (income) Yt (s), where@Yt (s)< 0 represents the burden of sanctions on the people.
@s

An amount Tt of income is expropriatedby the government as taxes so that:
Ct = Yt (s)

Tt :

(3)

The type A agents prefer not to pay any taxes as they do not bene…t from the provision of religion by
the state.
A pool of politicians, as a representative government, maximize national income in terms of rents,t (s)< 0 represents the burden of sanctions on the state, as well as taxes expropriatedRt (s), where @R@s

from the population T . Consequently, the utility of the government at time t adds up to
Vt = Rt (s) [T (1

(

1
t ))]

( t );

where ( t ) is the cost of providing religious goods to the society, and(4)
represents the importance of thetwo sources of income, rents and taxes respectively. A rentier state would for example more dependent
on rents and less on a tax system. Additionally, in the spirit of Coşgel and Miceli (2009), (t ) 2 [0; 1]

is the cost of taxation in terms of enforcement due to the resistance of citizens having their property
con…scated. Here, this cost is lower the more religion provides legitimacy for taxation, or when a higher
proportion of the population is religious oriented:

t

< 0,

< 0. The government optimizes its stanceby partially taking into account the necessities of the society. Its agenda therefore includes elementsthat are contingent on the economic conditions brought about as a consequence of sanctions. Thus,
depending on whether sanctions have a potentially high or low impact on the economy, i.e. on rents andincome, they assess the economic state of nature that prevails in t: xt = 1 re‡ects prosperous economic
conditions and resilience against sanctions and xt = 0 depicts economic hardship and vulnerability tosanctions, such that@Rt (s)@s jxt =0>@Rt (s)@s jxt =1

and@Yt (s)@s jxt =0>@Yt (s)@s jxt =1 .

Prior to the decision at each time t, the sender receives an imperfect signal rt 2 f0; 1g related toa change in the extent to which religion is merged with the state, or the level of theocracy. Namely,
De…nition 1 A move towards more conservative ideologies (an increase int ) is perceived by the senderas lower intentions to comply (rt = 1), whereas a step towards religious moderation (a lowert ) brings

an optimistic signal of rt = 0.
De…nition 1 states that an increase in the objectionable policy of the target country is viewed by
the sender as a signal of de…ance. More conservative ideologies here is viewed as extremism as it entails
expropriation from the population, discrimination in the society, and thereby a stubborn response to
the conditions set by the sender to lift sanctions. This signal is drawn from a state-dependent Bernoulli
distribution and is independent conditional on the current state with the following stochastic property:5Prfrt= ijxt = ig =Prfrt

= ijxt 6= ig = 1

depicting the informational environment andbe bounded, i.e.

for i 2 f0; 1g;(5)for i 2 f0; 1g;

de…nes the quality (accuracy) of the signal, assumed to

2 [0; 1].

The timing of the events in each period t is as follows:
1. Nature decides the economic state xt (i.e., good or bad economic conditions).
2. The target observes the state of nature and chooses the optimal level of religious ideology in the
state

t.

3. The two parts of the society confront to implement their preferred policy.
4. The sender evaluates the signal sent by the target country and decides whether to impose or lift
sanctions.

4

The Target Country

4.1

Confrontation among the Population

We analyze a situation in which the target government attempts to compensate the losses in the valueof its natural resources caused by sanctions through tax expropriation. The incumbent is howeverconstrained to keep the faction in favor of religious o¤erings su¢ ciently well-o¤ for the taxation to go
through. We refer to this minimum satisfactory level of utility that keeps type B loyal to the state as U .
The government must hence maximize utility given the participation constraint of the religious type:
UtB > U

Yt (s);(6)

where the …rst inequality secures the loyalty of the group devoted to religion in defending the government
and its taxation practices against potential opposition by the rest of the population. In this set-up, notethat the materialists never reach the minimum utility level U and are therefore always resistant tocontribute to the government, i.e. UtA < U ) UtA < UtB . This ensures that due to a rise of ideology
within the country (as a result of the optimal policy), the religious type B is always satis…ed to defend
the policy against type A. Remaining silent results in the success of the materialists in changing thegovernment policy and switching to an environment without taxation and religion provision by the state,
which yields an equal utility for the whole population equal to their income: UtA = UtB = Yt (s). It thus
guarantees that their utility post-confrontation is higher than what it would be if they remain passive
since u( t ) > Tt .
6

If the participation constraint (6) is satis…ed, the two sides of the population meet to implement
their preferred policies after the level of state-provided religion, ^t , is decided at the beginning of eachperiod.5 We assume that the power of the two sides is represented by a linear contest success function Ft
proportional to their size and their well-being: FtA ( ; UtA ) = (1)(U UtA ) and FtB ( ; UtB ) = (UtB U )respectively. Prospects of success of each group is increasing in its own size, i.e.

@FtA (:)@F B (:)< 0, @t> 0.
@

In addition, group A has more incentives to change the tax policy the further away it puts them fromU , and group B has more incentives to protect the policy the more bene…ts it brings them with respect
to U . In other words, a lower UtA provokes type A to …ght more viciously in a confrontation, whereas ahigher UtB induces type B to stand more strongly against them to protect the status quo. More precisely,
the de…nitions of UtA and UtB from (2) reveal that more ideology u( t ) increases the incentives of thereligious to defend the dual system of taxes and religious provision by the state, whereas a lower income
Yt (s) increases the discontent of both groups due to the lower consumption possibilities. A reduced
Yt (s) therefore increases the incentives of the materialists to challenge and decreases the inspiration of
the religious to stand against them. The properties of the contest success function can be summarized@F A (:)@F B (:)@F B (:)t)

as @Ytt (s) < 0; @Ytt (s) > 0; @u(t> 0. Thus, the second constraint faced by the government when

optimizing the level of religion provision is
FtB ( ; UtB )FtA ( ; UtA ):(7)

Whether sanctions succeed or fail therefore depends on how FtA ( ; UtA ) and FtB ( ; UtB ) are affected with the imposition of sanctions and whether the condition in (7) is feasible. FtB (:) is more likely
to surpass FtA (:) when (i) the proportion of the population who are religious, , is large, (ii) the extent
to which they appreciate religion or their level of beliefs, u( t ), is high.

4.2

The Provision of Religion by the StateAt the beginning of each period t, the government sets the optimal level of religion. First, equality in(7) gives a level of taxation equal toTt = Yt (s) + u( t )

U:

(8)

Taking both participation and incentive constraints into account, the government problem canbe written as:

max Rt (s) [T (1

1
t ))]

(

( t)

(9)

t

s.t. FtB ( ; UtB )FtA ( ; UtA );UtB > U:
5 See Gershenson (2002) for an alternative framework in which sanction in‡uences civil con‡ict in a target country.

7

According to (9), the government must decide to what extent religion provision must be executedby the state. It follows that:
8
>
>
>
<

@st @Rt (s)
@ t>
@s (1
>
>
:|

^ )
t

|

Tt (1
(
)
Rt (s){zt ))e ¤e c t o f sa n c tio n o n re nts

{z

+

}

@Yt (s)
[1
@s
|
{z

(

t )]

}

e ¤e c t o f sa n c tio n o n in c o m ech a n g in g p ro b a b ility o f sa n c tio n s b e in g im p o se d o r lifte d

9
>
>
>
=
>
>
>
;

+

0

( t) =}|u0 ( t )[1

(

{z

t )]

re lig io sity

Tt 0 (

t)

:
}

(10)

P roof. See the Appendix.
Marginal costs and marginal bene…ts of providing religion must be equal. The left-hand-side
indicates the state’s marginal cost of religious provision through its relevance in provoking sanctions( @@st ) and its subsequent impact on rents and income, while the right-hand-side contains the marginaltbene…ts of religion that arise from increasing the utility of the religious type and facilitating taxation. If
the marginal costs of providing an additional unit of religion is higher (lower) than its marginal bene…ts,
then it is optimal to introduce a more moderate (conservative) ideology by the state. The magnitudeof the marginal costs depends on the economic state of nature revealed in the …rst stage of the game.
It also depends on the probability that religion can play a role in in‡uencing the policy of sanctions,which is directly correlated withfrom (5). Examining (10) reveals some comparative statics that aresummarized in the following Lemma:
Lemma 1 It is more costly to increase the provision of religious ideology by the state when (i) religion
is highly relevant in the decision of the sender to impose sanctions, high @@st , (ii) the economic state in
t

t (s)
t (s)
the target has revealed xt = 0, high @R@s
and @Y@s, (iii) there is high dependence on natural resource(oil) rents, high . Providing religion is instead more bene…cial when (i) there is a large e¤ ect of religion
on the utility of type B, high u0 ( t ), (ii) there is a large e¤ ect of religion on facilitating tax collection,
high

0

(

t ), (iii) a high proportion of the society is religious, high.

P roof. Follows directly from expression (10).

4.3

The Impact of Sanctions

We start by observing that incentive and the participation constraints in (6) and (7) must be satis…edfor ideology to play an active role in the …rst place. We can therefore state:

Lemma 2 Religious provision by the state can be used as a tool for resilience against sanctions when
the proportion of the religious type in the country, , or the intensity of their religious values u( t ) arelarge.

8

P roof. Looking at conditions (6) and (7), and the de…nitions of the contest success functions
FtA (; UtA ) = (1)(U

UtA ) and FtB ( ; UtB ) = (UtB

in the presence of a large

U ), we can see that they can only be satis…ed

and/or a large u( t ).

Sanctions can instead be deemed e¤ective in societies in which ideologies such as religion do not
and u( t ) take a low value.6

have a signi…cant role in the population and the state, that is, where

If this is the case, the government is unable to collect taxes and would not …nd it optimal to provide
religion as long as ( t ) > 0. To see this suppose a simple setting in which ^t

0. In this case there is

no reason for the religious to engage in con‡ict to protect the government because they would not …nd
it optimal to engage in confrontation for any Tt > 0. Here, ideology does not have an added value, itcannot be used as a device against sanctions and the tax policy cannot be legitimized. This is the only
case in which sanctions are perfectly e¤ective independent of the state of nature as they equally create
hardship among the whole population leading to cooperation.
At times of sanction the government compensates the religious group with religion to make up
for their material loss. This is more convenient when a higher proportion of the society is religious.
Likewise, religion is a more powerful tool when u( t ) is high, otherwise it may be optimal to reduce
religion to give a signal of cooperation as a consequence of sanctions. To see the e¤ect of sanctions in thetarget country, …rst recall that UtBby the state, i.e. when Tt [1(

UtA is true as long as taxes are levied and religion is implementedt )] >( t ). Since U is constant, a reduction in Yt (s) in (2) due tosanctions must be compensated by providing a higher level of religion to increase u( t ). This is the only
way to maintain the loyalty of the group devoted to religion in confronting the rest of the population
to defend the government in power and its taxation practices. Sanctions are therefore likely to trigger
an increase in the provision of religion in order to make up for the direct losses in natural resource (oil)revenues through taxation.

Proposition 1 A reduction in rents and income brought about by sanction can be o¤ set by increasing
the level of religious provision by the state in order to use expropriation as an alternative source ofrevenues.
t (s)
t (s)
P roof. An increase in the LHS of (10) from @@st @Y@s
and @@st @R@sis o¤set by bene…ts ofttreligion on the RHS through a rise in the utility of the religious population, u0 ( t ), and more taxation
brought about by increased legitimacy, Tt 0 (t ).

By observing the impact of sanctions on the economy, the government …nds itself in one of the twostates of nature and evaluates the bene…ts of religion provision given the impact of sanctions. The impact
6 Associating the aggregate level of secularism in the target country with development would imply that such mechanism
would be stronger in less developed countries (higher u( t )). Similarly, a positive relation between religious beliefs andpoverty would suggest a more important role for ideology when the proportion of the poor is large in the society (higher).

9suggested in Proposition 1 is more intensive when the state of nature reveals a good economic situation,
xt = 1, so that sanctions do not drastically decrease rents and income. Under such circumstances costsof expanding religious services are not so high. In this way religion can be used to legitimize taxation ina country where religious ideology has deep roots in the society. On the contrary, under an undesirable
state of nature, xt = 0, reducing religion is the optimal choice by the government to avoid further
sanctions.

t (s)
t (s)
Proposition 2 When sanctions have a small economic impact (low @R@s
and @Y@s), it is easier to

use religious ideology as an instrument to adapt by restoring losses in rents through taxation. When
t (s)
t (s)
and @Y@s), it is more convenient to reduce
sanctions are detrimental to the economy (high @R@s

religious provision to increase the probability of having sanctions lifted.
P roof. See (10) and Lemma 1.
Recall from De…nition 1 that a subsequent reduction (increase) in taxation (Tt ) and religion (^t )produce a signal of religious moderation (conservatism) rt = 0 (rt = 1) for the sender, who moves next
to choose its optimal policy regarding sanctions.

5

The Imposing Country

We now turn to the problem of the sender to explore the link between sanctions and the level of stateideology in an international context. We denotecountry in the past andpt

Pr(xt = 1j t (r);t (r) = fr1 ; :::; rt 1 g as the signals sent by the targett (s) = fs1 ; :::; st 1 g as the sender’s actions in previous periods. Suppose thatt (s)) is the prior belief that the state of the economy in the target country isstrong in period t (xt = 1) conditional on the observed history of actions and signals. Similarly, let
p~t (rt ; pt )Pr(xt = 1j t (r);t (s); rt ) be the posterior belief that the exogenous state is xt = 1 after therealization of the signal, rt . The posterior is used to compute the expected payo¤s of the two potential
actions in the two states. The sender chooses an action st which gives the highest payo¤ given the costof implementing sanctions, c. When the sender receives the signal rt = 1, it is optimal to impose asanction (st = 1) if and only if p~t > c.
Using a simple application of Bayes’rule, the sender’s decision can be expressed according to theprior belief pt :Proposition 3 In any period t,
for p

pt

p+ , st = 1 if and only if rt = 1,

for pt > p+ , st = 1 independent of rt ,10

for pt < p , st = 0 independent of rt ,
where
p =

(1

(1
)c
)c + (1

c)

and

p+ =

c
c + (1)(1c):

P roof. See Appendix.
Proposition 3 shows that the new information provided by the signal is irrelevant in altering thepolicy of the sender if the prior is su¢ ciently high (low) such that pt > p+ (pt < p ).7 Alternatively,
there exists a learning mechanism if ppt

p+ such that the decision re‡ects the t period infor-

mation (st = rt ). Since the state of nature is randomly assigned in each period, the main task of thesender is to correctly predict the appropriateness of sanctions. The accuracy of the signal sent by thetarget country, , determines the reliability of the new information revealed in period t, and hence thesize of the learning area introduced in Proposition 3.8 This range expands in , and shifts to the rightwith c. Together with the persistence of the state of nature,i , and c, accuracy determines the sender’saction such that

Proposition 4 When the quality of the signal sent by the target is su¢ ciently high, i.e.
the sender decides based on current information (i.e. ppt> ^ ( i ; c),p+ ).

P roof. See Appendix.
We can deduce from Proposition 4 that a su¢ ciently accurate signal can overcome the role ofpersistency of the state of the economy in the sender’s policy and persuade it to act based on the target’s
behavior. We can now establish an equilibrium in which the two players optimally choose their actions:

Proposition 5 When> ^ , learning always generates a win-win strategy in a perfect Bayesian equi-

librium:(a) xt=1 () (^1t ; rt = 1;

> ^) ) ppt

p+ such that st = 1;(b) xt=0 () (^0t ; rt = 0;

> ^) ) ppt

p+ such that st = 0;

(11)where we denote ^1t and ^0t as the optimal level of religion respectively in state xt = 1 and xt = 0, and^1 > ^0 .
tt

P roof. The proof directly derives from Proposition 4.
Proposition 5 points out that conditional on the state of nature, xt , the optimal level of religion^i truly reveals the prevailing state of the economy (rt = xt ). If the sender perceives this as a su¢ cientlyt
7 This is referred to as an informational cascade. See Banerjee (1992) and Bikhchandani, et al. (1992).
8 See Moscarini, et al. (1998) for more on the mechanism of social learning in a changing world.

11

accurate signal ( > ^ ), it revises its beliefs in accordance with the signal received. In this equilibrium
the sender gets the maximum payo¤ since st = xt , while the target country obtains the highest utility
from rents and taxation based on its optimization process. Hence, we denote it as a win-win strategy.
We can conclude that the sender and the target country can reach a win-win equilibrium, given
rational behavior by the two sides of the negotiation table. First of all, this setting generates a truthtelling mechanism since the target country never conveys a false signal regarding the state of nature,
xt , as the latter closely corresponds to its optimal level of religious conservatism ^t . It immediately
follows that if the target makes a move towards a more moderate ideology, lifting the sanctions is the
only move by the sender that can achieve a win-win solution. Similarly, and perhaps paradoxically, awin-win solution can also be reached through a combination of sanctions and resilience.
The learning equilibrium clearly implies that the relevance of information provided by the signal
is so high in expected terms that it overcomes the impact of persistency in the state of the economy,i.

On the contrary, when the latter dominates the e¤ect of the signal, there is no guarantee that the priorof the sender correctly corresponds to the current state of nature:

Proposition 6 The sender neglects the signal at time t and decides based on past information when
< ^ . If the prevailing situation is sanctions, then(a) xt=1 =) (^1t ; rt = 1;

< ^ ) ) pt > p+ such that st = 1;(b) xt=0 =) (^0t ; rt = 0;

< ^ ) ) pt > p+ such that st = 1:

(12)

P roof. The proof directly derives from Proposition 4.
The idea behind Proposition 6 is that although sending an accurate signal is in the interest of thetarget country in every period, persistency of the state of nature can work as a force against learning.
Here, the sender imposes sanctions irrespective of the signal sent. This action can be the right strategy
if xt = 1. Nonetheless, if the current state of nature deteriorates to xt = 0 (after several episodes of
x = 1), then an accurate signal of rt = 0 fails to persuade the sender to lift sanctions as persistenceof resilience contracts the learning equilibrium range. A similar concept holds for pt < p , where thesender never impose a sanction, i.e., st = 0, regardless of the signal received.
Figure 1 summarizes Propositions 3-6 and shows the outcome for all combinations of the priorand the state of nature. Looking at the thresholds p+ and p the …gure shows how the learning interval
can expand withand shift to the right with c. The win-win equilibrium takes place in the center regionof the …gure, where the target gives up its objectionable policy to avoid sanctions through diplomacy
or sanctions follow as a response to a gesture of de…ance. The side regions represent the cases where
the sender’s decision is based on past information about the state of the economy. On the left, the12µ > ^µ

xt= 0

xt= 1

no sanction & vulnerable
peace(prop 6a)

win-win
diplomacy(prop 5b)

sanction
mistake(prop 6b)

st= 0

st= 0

st= 1

no sanction
mistake(prop 6b)

win-winsanction(prop 5a)sanction & resiliencewar?
(prop 6a)

st= 0

st= 1

st= 1

(prop 4)µµ(prop 4)
c

c
p-

p+

(prop 3)(prop 3)pt

Figure 1: Sanctions, Diplomacy, and Resilience

expectation of vulnerability results in no sanctions, which could be the correct decision when xt = 0 andmisplaced if xt = 1. Alternatively, sanctions are always in place on the right side due to the persistenceof resilience either as an untimely policy when xt = 0 or the correct form of punishment if xt = 1.
Finally, the analysis falls short of assessing additional options on the table due to the simple
binary nature of the sender’s utility function. If for example the choice of military attack is incorporated
into the model, it would only be reasonable in a situation of stalemate under persisting resilience andsanctions (xt = 1; st = 1) at the bottom right of the …gure. Here the opportunity cost of continuous(ine¤ective) containment through sanctions amounts to a one-shot military action that may achieve thejob and reduce the risk faced in future periods. In the present model, however, committing a mistake
could be very costly, perhaps more than sanctions, since the current state of nature is unobservable.9

6

Concluding Discussion

Our research has explored how the potential consolidation of religion and state in a theocracy governs theoutcome of economic sanctions. In so doing, we showed situations under which political instruments suchas sanctions increase the magnitude and the persistence of religious ideology in the target country. In a
rentier state, leaning towards such ideology facilitates the regime’s task of rent extraction as a substitute
9 The sender would su¤er a loss if it attacks when the target is ready to comply, that is when x

13

t = 0.

for the sanction-caused reduction in rents. Additionally, resorting to religion buys the sympathy of thereligious population, replacing their material loss caused by sanctions with religion and the realizationof their beliefs. This allows the state to strengthen its defense, against the world and its own population,
and at the same time increase their support within the population. A sanction therefore may at times
defeat its own purpose by strengthening the regime in power. The model reveals that signals sent by atarget country play a crucial role in the decision of imposing or lifting a sanction and leads to a stableequilibrium over time.
The political economy model applied in the paper is set to capture the political system in atheocratic state. When religion plays an important part in the role of the state, decisions about themagnitude of its involvement in policy decisions over time are made endogenously by the ruling regime.
National rents belong to the government, whereas the interest of the population is directed on theirincome. In addition, a proportion of the population who share the government’s ideology enjoy the
support of the government and in return provide protection to the government policies. In other words,
a potential con‡ict is not motivated by capturing the national rents, but to create circumstances thatwould improve individual welfare. The two parts of the society therefore meet to implement theirpreferred policy, whereas the state balances their power to create stability. Nevertheless, our results
remain robust under a di¤erent theoretical set-up more similar to Acemoglu et al. (2001), where an
uprising could lead to the ousting of the incumbent regime.
The most extensive data on economic sanctions is provided in Hufbauer et al. (2007), whoargue that sanctions work one-third of the time. Proponents of the use of sanctions argue that economic
pressure can help achieve desirable goals while avoiding the high costs of military intervention (Baldwin,1985). Economic pressure typically takes place alongside other important events and developments, suchas a weak economy. Here diplomacy is an alternative option overlooked in the literature, which could
practically even avoid the cost of sanctions if they succeed to prevent the target from carrying out its
objectionable policy. The history of sanctions hints that there is no unique equilibrium to a complex
problem as such. It reveals the existence of, and the contemporaneous interplay between, several factors
in determining the conduct by each side and the prospective outcome. The simultaneous competitionand cooperation in a world of asymmetric information may indeed lead to completely di¤erent outcomes.
Societies that are divided or naturally heterogeneous before sanctions may become even more
fragmented by the economic e¤ects of sanctions if the economic pain is not equally distributed acrossgroups in society. In response to economic pressures brought about by sanctions, it is natural that atleast a part of the population would resort to their elemental non-pecuniary ties that can for example
originate from their ethnic, religious, or national identity. Our argument is that a leader can use thisheterogeneity to its advantage to increase the pain threshold of the state by promoting the appropriate
ideology. In sum, an ideologue regime is therefore more resistant and harder to contain using economic

14

sanctions.
Our hypothesis on theocracy can be expanded to other beliefs or other forms of identity. International sanctions could spark a rise in popularity for the target government through the so-called rally
around the ‡ag e¤ect (Mueller, 1970). Leaders of these countries can also pinpoint the imposing state(s)as a clear external threat to the nation and therefore a common enemy to unify the state (Miyagawa
1992). There are many concrete examples that can be observed across the world. The U.S. ban on
travel and trade with Cuba since 1960 in protest against the turn to communism by Fidel Castro havenot induced any major change in Cuba’s communist system despite keeping Cuba poor. North Korea
has lived with international sanctions since 1950 and the more recent sanctions imposed by the U.N. todiscourage it from pursuing its nuclear weapons program and punish it for human rights violations has
had little e¤ect on the actions of Kim Jong-Il or his son Kim Jong-Un. Likewise, multilateral sanctions
imposed against Iraq after its invasion of Kuwait were quite devastating in terms of their economic
impact but were much less e¤ective politically due to fragmentation of the Iraqi opposition. Di¤erently
in South Africa, the ethnic minority in power had a vested interest in maintaining the status quo andshielded the white supporters from the pain of sanctions. In this case, sanctions could have played a role,even if small, in putting an end to the apartheid regime because the white community only accounted
for a smaller percentage of the population, i.e. violating our Lemma 2.
Although our theory can be applied to any ideology that can help attract loyalty at times ofdeprivation, religion has a credible history to serve as a substitute for material needs. Where governments
and economies function poorly, religion often becomes major suppliers of (i) social services, (ii) politicalaction, and (iii) coercive force at the same time (Iannaccone and Berman, 2006). We therefore believe
it can work as a more credible shield against sanctions. We do, however, show that diplomacy can beused as a preferred mode of interaction upon the receipt of the appropriate signal even in the case ofa theocracy. Our analysis also leaves room for future research regarding arguments such as the size ofthe target country and the of severity of sanctions, which could play a large role in the e¤ectiveness of
sanctions against countries such as Russia and China.

15

A

Appendix

A.1

Government’s Optimization Problem
1

R

[T (1

[T (1

(

(
R(s)

=

1
t ))]
t ))]

1

@st 0
R (s)+(1@ t)R(s) [T (1@st 0
R (s)+(1
@ t

)

@st 0
R (s)
@ t

[T (1

u0 ( t )[1

(

t )]

(
R(s)
Tt

t ))]

0

(

[T (1
1

t)

(

R(s)
(

t ))]

(1

)

[T (1

@st 0
Y (s)][1@ t[ u0 ( t ) +@st 0
Y (s)][1
@ t

(

)

@st 0
Y (s)[1@ t

T (1( t ))
@st 0
@st 0
R (s)
Y (s)[1
@ t
(1
)
R(s)
@ t
T (1
( t ))^ ) @st R0 (s)+ Y 0 (s)[1
t
@ t
(1
)
R(s)

A.2

[ u0 ( t ) +t ))]t )](1R(s)((t )] +

(

t )]

[T (1

(
(

R(s)
(

t )]

t )]

0

Tt
0

+

t ))]

0

Tt

(

(

0

t)

( t)

t ))]
0

+

( t ) = u0 ( t )[10( t) =u0 ( t )[1(

Tt 0 (

t )]

(

t )]

t)

Tt 0 (t)

Proof of Proposition 3

Under Bayes’rule, the t posterior probability p~t of imposing sanctions is a function of the past information embedded in the prior belief pt and the new information obtained through the signal rt ,p~t (rt ; pt )jst =i =Pr(rt = ijxt = i) Pr(xt = ij|t )Pr(rt = ijxt = i) Pr(xt = ij|t ) + Pr(rt = ijxt 6= i)(1Pr(xt = ij|t )where |t is de…ned as the set enclosing the history of signals and actions, respectively;t (r) andt (s).

In particular, given the state xt = 1, the t posterior probability that a sanction is appropriate, i.e.
st = 1, is:pt

p~t jst =1 =;pt + (1)(1 pt )where the optimal choice is realized by comparing p~t jst =1 and c. Similarly, the decision of no
sanctions is optimal whenever p~t jst =0 > c.

After some manipulations, we observe that sanctions are surely imposed whenever pt > p+ , where

p+ =

c
c+(1

)(1 c) .

We therefore obtain a lower bound prior below which sanctions are not applied

whenever pt < p , where p = (1(1)c+)c+ (1 c) . The two extreme areas, respectively pt > p and pt < p,implicitly suggest that the choice is only guided by past information. In the former case, the optimal
strategy is to impose sanctions, independently from the received signal. In the latter case, the optimal
choice is refrain from imposing a sanction, whatever is the new information provided by the signal .
Moreover, there exists a learning space when the prior pt falls within the two bounds, p

pt

p+ . In

this case, the t period information provided by the signal, rt , systematically overcomes past informationfrom pt . Based on the available information, we may summarize the sender’s optimal actions as follows:8+>
pt p+ if rt = 1;
<1 () pt > p or pst =>:0 () pt < p or p
pt p+ if rt = 0
16

0

t)

( t) = 0( t) = 0A.3

Proof of Proposition 4

In proposition 3, we demonstrate that current information (through signal) is more relevant than pastpt

p+ . Here we claim that this learning area is not …xed, but expands

when the accuracy of the signal

increases. In particular, we show the su¢ cient condition for , which

information, whenever p

ensures that the prior of imposing a sanction, pt , always falls within learning area. This is possible
by relating the impact of persistence of the state of nature f0; 1g on the bounded beliefs, p+ and p .
Note that the exogenous state of nature at time t is unobservable by the sender, since it can only
capture the probability that the state of nature is persistent. Looking at the sender’s evaluation ofpt , we investigate the case when sanction is an appropriate action (st = xt = 1). The phenomenon
from t1 to t is considered persistent when Pr(xt = 1jxt 1 = 1) =Pr(xt = 1jxt 1 = 0) = 1
increasing insuch that if
Whensuch that if

1,

and not persistent when

0 . Therefore, for a given cost, c 2 [0; 1], on one side, p= 1 then p+ = 1. On the other side, p = (1

+

=

c

)(1 c) is(1)c)c+ (1 c) is decreasing inc+(1= 1 then p = 0.
1 > p

+

, the persistence of the state of nature (xt = 1) from t

prior upper bound. This results when<

1 , where

1 =

1 (1

c)
1 (1 c)+c(11)

1 to t dominates theand suggests that for a lower

level of accuracy, the sender’s choice of sanction is entirely guided by information from persistence of theeconomic state. When p < (10 ), instead, it means the probability of the state changing from t

t is higher than the prior lower bound. This is possible when

>

0,

where

c 0
0 = c 0 +(1 c)(1

0)

1 to
, suchthat the accuracy of the signal is high enough to make current information relevant. Thus, pt 2 [p ; p+ ]if and only if>^

maxf 0 ;1 g. This is the su¢ cient condition ensuring that a learning zone always

exists. The higher the persistency f 0 ; 1 g, the higher is thelearning range.

17

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19