Inflationary Bidding: Fiscal Constraints and Great Power Competition

We construct a three-stage complete information model based on the classic work of Hotelling (1929), Bernheim and Whinston (1986), and Groseclose and Snyder (1996) to study influence competition between an incumbent hegemon and a rising challenger. The model reveals a novel mechanism driving the dynamics of order transition: inflationary bidding. As the challenger's economic gravity increases, the allegiance of peripheral states becomes more expensive, compelling the hegemon to pay escalating subsidies merely to maintain the status quo. If the hegemon's budget is insufficient, the escalating costs will eventually breach the fiscal constraint. At this point, the hegemon is forced to abandon peripheral allies, triggering a sudden collapse of the existing order. Conversely, if the hegemon's budget is deep enough to absorb these rising costs, the system can settle into a stable bipolar stalemate. By formalizing these dynamics, our work provides a precise micro-foundation for Kennedy's (1987) thesis of imperial overstretch.