# A Theory of Economic Coercion and Fragmentation | Hoover Institution Source: https://www.youtube.com/watch?v=k7xB_eaZm4M Recap page: https://rapidrecap.app/video/k7xB_eaZm4M Generated: 2026-02-01T10:32:45.514+00:00 --- ## Quick Overview Matteo Majori presents a model showing that the same features generating gains from trade, like returns to scale and specialization, also create dependency that a dominant country, the 'hedgeimon,' exploits through economic coercion, while preemptive anti-coercion policies by smaller nations risk leading to inefficient over-security and fragmentation. **Key Points:** - The core mechanism highlighted is that increasing returns to scale and specialization, which create efficiency gains from trade, simultaneously generate dependency, making smaller nations vulnerable to coercion. - The hedgeimon has an incentive to 'hyper globalize,' inducing integration beyond what a benevolent planner desires, specifically to increase centrality and create addiction to dealing with the hedgeimon, thereby strengthening threats of exclusion. - Anti-coercion policies, when pursued independently by nations trying to shape their economies ex-ante to withstand bullying, can lead to an inefficient 'doom loop' where everyone over-secures and ends up quite poor due to excessive fragmentation. - The hedgeimon's optimal coercion strategy involves two rationales: tweaking policies to shape the equilibrium in its favor (like an optimal tariff) and, crucially, actions that increase dependency by discouraging alternatives, even if those actions are privately costly to the coerced country. - Majori shifts the economic view of international organizations from being incarnations of a global planner to potentially being constraints imposed by the hedgeimon to lure the rest of the world into dealing with them, which requires commitment from the dominant power to limit extraction. - In a specialized finance example using SWIFT, the hedgeimon incentivizes usage of the global system (beneficial for global productivity) while simultaneously discouraging the creation of domestic alternatives (which increases vulnerability to threats). **Context:** Matteo Majori from Stanford GSB discusses his paper on a theory of economic coercion and fragmentation, building on previous work on the offensive use of geoeconomics by dominant countries. This paper focuses on the defensive side—how countries should react to coercion threats. The model utilizes a global input-output matrix framework where a single dominant country (the hedgeimon) threatens exclusion from controlled inputs, and other countries implement ex-ante anti-coercion policies to mitigate this influence. ## Detailed Analysis Majori develops a model where economic power stems from the ability to extract surplus via threats of exclusion, contrasting the private cost of an action to the coerced nation with the social value to the hedgeimon. The model reveals that the sources of trade gains—like specialization under increasing returns—are also the sources of dependency, as the specialized alternative becomes a poor substitute if access is cut off. The hedgeimon seeks to 'hyper globalize' to maximize dependency, often by discouraging the development of alternative supply chains, which is contrary to the goals of a benevolent global planner or a Nash policy equilibrium. For instance, in the financial services example, the US government might push for lower markups on its firms (bad for firm profit) to flood the market, making it extremely hard for rivals like China to build viable payment system alternatives. The discussion shifts to the role of international organizations, suggesting economists often mistakenly view them as global planners, whereas political scientists view them as incarnations of the hedgeimon; Majori argues that for the system to function beneficially for all, the hedgeimon must make a credible commitment to limit its extraction, which can then lure others into integration. Finally, he notes the importance of quantitative analysis in this field because the most powerful threats are often off the equilibrium path, visible only through the resulting policy changes and structural shifts. ### Model Foundation - The theory uses participation constraints and wedges in first-order conditions to define power - Coercion involves threatening loss of inputs controlled by the hedgeimon in exchange for costly actions or transfers - Anti-coercion involves ex-ante policies designed to improve a country's outside option if cut off. ### Source of Dependency - The exact elements generating gains from trade, such as returns to scale and specialization, are identified as the source of dependency that the hedgeimon exploits. ### Hedgeimon's Strategy - The dominant country incentivizes integration beyond optimal levels to create addiction, and exploits the gap between the private cost of an action and its greater social value to the hedgeimon, particularly by discouraging alternative production. ### Anti-Coercion Outcomes - If every country implements anti-coercion policies independently, the result is an inefficient 'doom loop' leading to over-securitization and fragmentation, making everyone poorer. ### Benchmarks Comparison - The model compares the hedgeimon outcome against a Global Planner (maximizes total GDP by subsidizing positive externalities) and Nash Policy (countries independently optimize domestic policy, under-subsidizing cross-border positive externalities). ### Financial Coercion Example - Using SWIFT, the hedgeimon pressures nations to rely on the global system (boosting its productivity) while simultaneously discouraging domestic alternatives, thereby maximizing vulnerability to threats. ### Role of International Organizations - Majori reflects that these bodies may function less as global planners and more as mechanisms where the dominant power commits to rules to limit extraction, thereby luring others into a mutually beneficial, though power-imbalanced, equilibrium.