Research appears to substantiate the liberal conviction that trade fosters global peace. Still, existing understanding of linkages between conflict and international economics is limited in at least two ways. First, cross-border economic relationships are far broader than just trade. Global capital markets dwarf the exchange of goods and services, and states engage in varying degrees of monetary policy coordination. Second, the manner in which economics is said to inhibit conflict behavior is implausible in light of new analytical insights about the causes of war. We discuss, and then demonstrate formally, how interdependence can influence states' recourse to military violence. The risk of disrupting economic linkages—particularly access to capital—may occasionally deter minor contests between interdependent states, but such opportunity costs will typically fail to preclude militarized disputes. Instead, interdependence offers nonmilitarized avenues for communicating resolve through costly signaling. Our quantitative results show that capital interdependence contributes to peace independent of the effects of trade, democracy, interest, and other variables.

In the wake of negotiated settlements to civil wars, one critical problem involves reassuring people who have been killing one another that conflict is not about to break out again, endangering people's lives. Those concerned with the success of negotiated settlements have debated how best to enhance the prospects of a stable peace. We address this question by exploring variables that may explain the longevity of negotiated peace settlements. These variables are divided into two categories—one tapping into the potential effects of the environment in which settlements are negotiated and another focusing on the impact of settlement arrangements. On the basis of our analysis of thirty-eight civil war settlements negotiated between 1945 and 1998 we identify the environmental factors and institutional choices that affect the short-term stability of the peace following civil war.

Drawing on the analytical framework developed by Barbara Koremenos, Charles Lipson, and Duncan Snidal in the Rational Design project, I seek to shed light on the striking institutional differences among the various methods of international commercial dispute resolution for private parties. These methods include recourse to public courts and more frequently to private international courts, such as the International Court of Arbitration of the International Chamber of Commerce or the London Court of International Arbitration, as well as recourse to so-called ad hoc arbitration and alternative dispute-resolution techniques, such as conciliation and mediation. The key institutional dimensions along which these methods of international dispute resolution vary are (1) procedural and adaptive flexibility, and (2) centralization of procedural safeguards and information collection. I explain why different methods of international commercial dispute resolution are selected. I argue that these methods respond to the varying institutional needs of different types of disputes and disputants. Such needs can be explained in terms of the severity of the enforcement problem, uncertainty about the preferences or behavior of contractual partners, and uncertainty about the state of the world.

Some of the most important phenomena in international conflict are coded as “rare events”: binary dependent variables with dozens to thousands of times fewer events, such as wars and coups, than “nonevents.” Unfortunately, rare events data are difficult to explain and predict, a problem stemming from at least two sources. First, and most important, the data-collection strategies used in international conflict studies are grossly inefficient. The fear of collecting data with too few events has led to data collections with huge numbers of observations but relatively few, and poorly measured, explanatory variables. As it turns out, more efficient sampling designs exist for making valid inferences, such as sampling all available events (wars, for example) and a tiny fraction of nonevents (peace). This enables scholars to save as much as 99 percent of their (nonfixed) data-collection costs or to collect much more meaningful explanatory variables. Second, logistic regression, and other commonly used statistical procedures, can underestimate the probability of rare events. We introduce some corrections that outperform existing methods and change the estimates of absolute and relative risks by as much as some estimated effects reported in the literature. We also provide easy-to-use methods and software that link these two results, enabling both types of corrections to work simultaneously.

Europe's postwar shift to multilateral trade and payments arrangements was complicated by three factors. Distributional problems and uncertainty about the state of the world made European governments reluctant to adopt multilateral arrangements without financial support from the United States. An enforcement problem made U.S. policymakers reluctant to finance a European multilateral trading system. The severity of these problems was reduced by institutional designs that combined flexibility, centralization, and particular decision rules. Centralization and flexibility reduced uncertainty and softened distributive conflict. Centralization and particular decision rules solved the enforcement problem that U.S. policymakers faced.

Literature on financial market liberalization focuses heavily on state activity in allocating preferential credit. I consider state activity in promoting nascent equity markets by asking why a state would create and promote a market in which the transaction costs are high, the potential rate of return is low, and firms are reluctant to list shares. I examine the case of the West African regional stock exchange and propose that the central bank for the West African Monetary Union created it to mediate the relationship between this region and the world economy. I propose that states and domestic markets act as complements rather than as rivals in some instances of bourse creation. Moreover, bourses in developing economies present a different set of relationships among states, public and private lending authorities, and market participants than their counterparts in more developed financial environments. This illuminates a need for further research in this area.

During the twentieth century states negotiated and ratified formal treaties on the treatment of prisoners of war (POWs). These treaties have created a system for the treatment of POWs with universal and detailed standards and decentralized enforcement. I explain the form of the POW system as a rational institutional response to four strategic problems the issue of POWs poses: monitoring under noise, individual as opposed to state violations, variation in preferred treatment of POWs, and raising a mass army. In response to these four problems, neutral parties help address the problem of monitoring the standards. The ratification process screens out some states that do not intend to live up to the standards. The two-level problem of state and individual violations is addressed by making states responsible for punishing the actions of their own soldiers. By protecting POWs, the treaties help states raise armies during wartime. The POW case supports many, but not all, of the Rational Design conjectures. In particular, it suggests other strategic logics to explain variation in the membership and centralization of international institutions.

The authors of “Legalization and World Politics” (International Organization, 54, 3, summer 2000) define “legalization” as the degree of obligation, precision, and delegation that international institutions possess. We argue that this definition is unnecessarily narrow. Law is a broad social phenomenon that is deeply embedded in the practices, beliefs, and traditions of societies. Understanding its role in politics requires attention to the legitimacy of law, to custom and law's congruence with social practice, to the role of legal rationality, and to adherence to legal processes, including participation in law's construction. We examine three applications of “legalization” offered in the volume and show how a fuller consideration of law's role in politics can produce concepts that are more robust intellectually and more helpful to empirical research.

International relations scholars make frequent use of pooled cross-sectional regression in which N dyads over T time points are combined to create NT observations. Unless special conditions are met, these regressions produce biased estimates of regression coefficients and their standard errors. A survey of recent publications in international relations shows little attention to this issue. Using data from the period 1951–92, we examine the consequences of pooling for models of militarized disputes and bilateral trade. When pooled models are reestimated to allow for stable but unobserved differences among dyads, the results are altered in fundamental ways.

Mark Twain has been quoted as saying, “It is admirable to do good. It is also admirable to tell others to do good—and a lot less trouble.” Twain's perhaps apocryphal aphorism could be adapted to contemporary social science scholarship: It is admirable to articulate and seek to apply new concepts. It is also admirable to tell others what is wrong with their concepts—and a lot less trouble.

Martha Finnemore and Stephen Toope, in their comment on our summer 2000 special issue of IO, “Legalization and World Politics,” seem to be following this adaptation of Twain's advice. They think that our definition of legalization focuses too much on formalized constraints, that it does not relate closely to broader concepts of law, that we are too committed to a rational-strategic approach to politics, and that we do not have a theory of what generates obligation. They do not attempt, in their critique, to produce an alternative conceptualization that attains the breadth they seek without sacrificing conceptual and theoretical coherence. We thought that our own argument was both “dynamic” and “process-oriented,” so we look forward with interest to their attempt to improve on our work. We particularly look forward to a carefully designed research program that will evaluate fairly the many empirical claims that they advance.

In their article in this issue, Donald P. Green, Soo Yeon Kim, and David H. Yoon claim, contrary to liberal theory and extensive evidence, that neither joint democracy nor economic interdependence significantly reduces the frequency of militarized interstate disputes in pooled time-series analyses when dyadic fixed effects are taken into account. Similarly, their fixed-effects analyses contradict theory and previous evidence that democracies have higher levels of trade with one another than do other types of states. Our reexamination, however, refutes both claims and reinforces previous findings. Their fixed-effects analyses of disputes produces distorted results because they consider a relatively short time period, 1951–92, in which variation in the binary dependent variable and the key independent variables, democracy and trade, is limited. When we analyze a longer period (1886–1992), the results confirm liberal theory. The differences between our analyses of bilateral trade and those of Green, Kim, and Yoon primarily arise from a seemingly minor methodological decision. A more reasonable method confirms that democracies do have higher levels of trade than expected on purely economic grounds. Though we do not advocate a fixed-effects model for analyzing these data and have serious reservations about its general usefulness, our findings provide additional confirmation of liberal theories of international relations.

In the aftermath of World War II, states created a complex set of bilateral and multilateral institutions to govern international aviation markets. National governments concluded bilateral agreements to regulate airport entry and capacity and delegated to the airlines, through the International Air Transport Association (IATA), the authority to set fares and the terms of service in international markets. The resulting mixture of public and private institutions produced a de facto cartel that lasted for more than thirty years. Consistent with the Rational Design framework put forth by Barbara Koremenos, Charles Lipson, and Duncan Snidal, I argue that the institutions states created reflect the bargaining and incentive problems generated by international aviation markets. This case provides support for four of the Rational Design conjectures and slightly contradicts three others.

Donald P. Green, Soo Yeon Kim, and David H. Yoon argue that many findings in quantitative international relations that use the dyad-year design are flawed. In particular, they argue that the effect of democracy on both trade and conflict has been vastly overstated, that researchers have ignored unobserved heterogeneity between the various dyads, and that heterogeneity can be best modeled by “fixed effects,” that is, a model that includes a separate dummy for each dyad.

We argue that the use of fixed effects is almost always a bad idea for dyad-year data with a binary dependent variable like conflict. This is because conflict is a rare event, and the inclusion of fixed effects requires us to not analyze dyads that never conflict. Thus while the 90 percent of dyads that never conflict are more likely to be democratic, the use of fixed effects gives democracy no credit for the lack of conflict in these dyads. Green, Kim, and Yoon's fixed-effects logit can tell us little, if anything, about the pacific effects of democracy.

Their analysis of the impact of democracy on trade is also flawed. The inclusion of fixed effects almost always masks the impact of slowly changing independent variables; the democracy score is such a variable. Thus it is no surprise that the inclusion of dyadic dummy variables in their model completely masks the relationship between democracy and trade. We show that their preferred fixed-effects specification does not outperform a model with no effects (when that model is correctly specified in other ways). Thus there is no need to include the masking fixed effects, and so Green, Kim, and Yoon's findings do not overturn previous work that found that democracy enhanced trade.

We agree with Green, Kim, and Yoon that modeling heterogeneity in time-series cross-section data is important. We mention a number of alternatives to their fixed-effects approach, none of which would have the pernicious consequences of using dyadic dummies in their two reanalyses.

The Rational Design project is impressive on its own terms. However, it does not address other approaches relevant to the design of international institutions. To facilitate comparison I survey two “contrast spaces” around it. The first shares the project's central question—What explains institutional design?—but addresses alternative explanations of two types: rival explanations and explanations complementary but deeper in the causal chain. The second contrast begins with a different question: What kind of knowledge is needed to design institutions in the real world? Asking this question reveals epistemological differences between positive social science and institutional design that can be traced to different orientations toward time. Making institutions is about the future and has an intrinsic normative element. Explaining institutions is about the past and does not necessarily have this normative dimension. To avoid “driving with the rearview mirror” we need two additional kinds of knowledge beyond that developed in this volume, knowledge about institutional effectiveness and knowledge about what values to pursue. As such, the problem of institutional design is a fruitful site for developing a broader and more practical conception of social science that integrates normative and positive concerns.