Regulation under Economic Globalization∗

How does economic globalization shape the regulatory policies that states impose to control negative externalities? I analyze a game-theoretic model in which states impose standards on a modern Ricar-dian economy involving trade and investment. I examine the impact of economic globalization on regulation, and allow collective regulation and deregulation. Three important results emerge. First, the analy-sis shows how the option to form coalitions lends states tremendous flexibility in dealing with international economic pressures. In striking contrast to models of unilateral policy formation, states compete and cooperate in conjunction both to deregulate and regulate. Second, the analysis explains why a “race to the bottom ” is less likely than a “race to top ” in the contemporary world economy. Finally, I find that distri-butional conflict and power politics are more central to regulation un-der economic globalization than collective-action problems. The need to constrain power politics, however, creates a complex second-order collective-action problem that international economic institutions may be designed to solve