INTERNATIONAL TRADE: INTERNATIONAL INSTITUTIONS.
Keohane argued that the existence of international cooperation or regimes could be explained through the rational-egoist models which are usually associated as the basic assumptions and analytical tools of the Realist approach. He stated that the situation of world community resembled the multiple-play or iterated rather than the single-play character of the Prisoners" Dilemma theorem. In an Iterated Prisoners" Dilemma, cooperation will be the dominant strategy. He also stated that from the point of Collective Action Theory, the international community resembled the case of "privileged" small group which are able to provide collective/public goods. The Prisoners" Dilemma theorem explained the reason for cooperation and the Collective Action theorem explained the existence of public goods such as international regimes.
Keohane explained the incentives for having international regimes through functional explanations. Functional explanations account for causes in terms of their effects. The incentives for rational-egoistic states to establish international regimes are explained by the rational anticipation that the regimes will increase or promote the welfare and interests of the states. Furthermore, in situations where the outcomes of direct (market-mediated) interactions among states are suboptimal (market failure), institutions or regimes are needed as ways to overcome the deficiencies.
In developing a functional theory of international regimes, Keohane started from the argument of political market failure and the Coase Theorem. Keohane stated that world politics is characterized by institutional deficiencies (externalities) that inhibit mutually advantageous cooperation (political market failure). The Coase Theorem asserted that the presence of externalities (which among others created the problem of public goods and collective action) does not necessarily prevent effective coordination among independent actors (market mechanism could still function despite externalities).
