The Mechanism and Stability of Global Imbalances

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We build a game-theoretic model of two superpowers competing to attract small countries as members for their clubs. The superpowers play a two stage sequential game (Stackelberg game) of choosing an ideological location for club goods they provide. The club goods have consumption externalities, i.e., the price which each member pays depends on others who join the club as members share the cost. To model the two-way interaction between superpowers and the other countries we usea coallition formation process (core) to determine the behavior of the small countries in each stage and derive the subgame perfect Nash equilbrium of the game between the two superpowers. We simulate our game to characterize how the US and China compete for a sphere of influence.