Setup

• Three players: Ruler ($R$), Elite ($E$), Foreign Sponsor ($F$).
• Two periods
• Complete information.
• Two issues under dispute.
• Solution: SPE.

Players and Sequence

Period 1:

1. $F$ chooses whether to fund a player,
2. $R$ offers $E$ a share of the domestic good.
3. $E$ accepts or rejects. Rejection triggers domestic conflict. Ruler still bargains with $F$. Game ends.
4. If accepted, $R$ chooses institutional strength $r\in \{r^h,r^l\}$ and offers $F$ a share of the foreign good.
5. $F$ accepts or rejects, Rejection triggers international conflict.

Period 2 (occurs with probability $1-r$):

1. The interaction repeats and the game terminates.

$w_E^{\ast }$ Divides Peaceful Results

Figure 1: Peaceful Thresholds

• $w_E^{\ast }$ divides peaceful results into weak institutions or strong institutions.
• A shift in favor of elites $\to$ weaker institutions.
• Example: Edward III and the House of Commons during the Hundred Years’ War

The Paradox of Strong Institutions

Proposition: In the three player model, strengthening baseline institutions can move the equilibrium result from peace to erosion or conflict.

• Mechanism: Power shifts are strategic
  • $r^h$ increases the value of foreign interference $\to$ increases chances of power shift

Conclusion

• Elite empowerment can weaken the state.
• Foreign sponsors fund elites strategically to erode domestic institutions
• Strengthening baseline institutions can increase the value of interference
• Gregory VII’s excommunication of Henry IV illustrates the logic