Ethnicity, Nationalism, and Democracy
Moral Hazard and Third-Party Intervention in Kosovo
Moral Hazard
•	What is its effect?
–	Risky behavior is encouraged by insurance
Moral Hazard: Examples
•	Example:
–	I purchased the CDW for my rental car. As such, I will definitely not be as careful with it as if I did not purchase it. Why?
–	In fact, just renting an automobile reduces the care I will take of it. Why?
•	Example:
–	I drive much more carefully when I drive in Europe than when I drive in the United States. Why?
•	Example:
–	My apartment complex pays my electric bill. As such, I tend to keep my apartment cooler in the summer and warmer in the winter than I normally would. Why?
•	Example:
–	I am much more willing to make risky loans to questionable people now that the US government has guaranteed my loans. Why?
Moral Hazard
•	From a rational actor point of view:
–	The insurance reduces the downside to an action while not affecting the upside
–	As such, the cost-benefit calculations I make are skewed in the direction of acting in the dangerous direction
–	This results in the insurer having to pay out insurance more often than expected from before-insurance numbers
•	The four types of moral hazard
–	Acute: If a specific threat of intervention triggers a rebellion in the state
–	Chronic: When a long-term history on intervention in a state perpetuates its instability 
–	Contagious: If intervention in support of rebels in one state spurs rebellion in a neighbor
–	Pervasive: When an emerging norm of humanitarian intervention inadvertently encourages rebellion more broadly
•	In terms of international relations and of ethnic conflict
–	When a body guarantees that it will step in to act, the probability that it will have to do so increases
•	Example:
–	Should the United States guarantee Taiwan’s autonomy, it will increase the probability that Taiwan will antagonize China to the point that China would have to invade. 
•	Example:
–	When the United States, the United Nations, and NATO all guarantee that they will step in militarily whenever a minority is being ethnically cleansed, the chance that an ethnic group will operate in a way to antagonize its state causing the state to react increases.
–	This is what may have happened in Kosovo
•	The US and the EU guaranteed the safety of the Kosovars. This gave them the impetus to revolt against their state (Serbia)
•	The results of guaranteeing minority protection includes:
–	Minorities incentives to provoke violence
–	Allowance of violent actions on minority groups
–	Refusal to endorse minority demands by majority
–	Refusal to bargain in good faith by minority
Moral Hazard Avoidance
•	Moral hazard theory has been a major step forward in the study of third-party interventions, but there are still some questions about its applicability and validity 
•	The primary question:
–	How do we create a system where minorities are protected from ethnic cleansing without encouraging them to revolt?
Moral Hazard: Kosovo?
•	What happened in Kosovo?
–	Post-World War II Yugoslavia
–	Improved living conditions at Pristina University
–	State welfare policy
–	Secret memorandum
–	Milosevic and Pavlovic
–	Arrival of the KLA
•	Was Moral Hazard really the problem?
–	The USA could have made its threats of abandonment against Kosovo Albanians more credible
•	It chose not to
–	But, even if the US was trapped
•	The ultimatum at Rambouillet, was the more important cause
Alternate Reading: Kosovo
•	In interventions in state-minority conflicts
–	Intervention makes continued coercion either impossible or more costly than capitulation
–	The state considers eliminating the minority less costly than capitulation
–	The state conjectures that the third-party is unlikely to escalate the intervention to thwart the state’s attempt to eliminate the minority
•	Questions:
–	Why would 3rd parties force such a choice?
–	Under what conditions is a target state likely to make this conjecture?
Conclusion
•	What are your takes on Moral Hazard Theory?
•	Does it make sense?
•	What can we do to circumvent it?