The Role and Welfare Rationale of Secondary Sanctions: A Theory and a Case Study of the US Sanctions Targeting Iran

Abstract

This paper investigates the role and the welfare rationale of secondary sanctions using a game theoretic framework and a case study of the US sanctions targeting Iran. Existing literature on secondary sanctions focuses either on the sender-third party or the sender-target relations, and fails to address the interdependency of the three players' strategies. An integrated approach allows us to examine the conditions under which the secondary sanction succeeds in coercing the third party to participate in a sanction campaign against a target. I argue that it acts as a commitment device for the third parties that value target compliance but find it too costly to voluntarily participate in the sanctions when the target complies at a suboptimal level. Despite the coercive nature, secondary sanction can be welfare improving for them. The framework provides an explanation of the successful outcome of the recent US secondary sanctions targeting Iran.