This new, important contribution to the branch of the literature on international institutions focuses on how the membership characteristics of international organizations (IOs) influence the effects of IOs. For example, Jon Pevehouse (“Democracy from the Outside In? International Organizations and Democratization,” International Organization 56 [Summer 2002]: 515–49) shows that the democracy characteristics of an IO’s members determine how effective it is in promoting democracy of other members. Julia Gray demonstrates that the political quality of an IO’s membership has a strong effect on investor perceptions of emerging market countries. When emerging markets join IOs with high average political quality, the risk premium that they pay on portfolio investment goes down; but when they join IOs with low average political quality, investors assess them as more risky and demand a higher risk premium.

Gray focuses on international economic organizations (IEOs), in particular the European Union (EU) and Latin American IOs including the Common Market for the South (Mercosur) and the Bolivarian Alternative for the Americas (ALBA), among others. She uses spreads on sovereign debt, or the risk attributed to a particular country as compared to a stable baseline security, as her measure of the perceived riskiness of emerging markets. As such, she considers the actions of individual bondholders, who operate under conditions of an information glut and who must be attentive to the perceptions of other market actors. Gray’s theory focuses on information and reputation, and how IEO membership influences that reputation. However, in contrast to most other work on IOs and information, she argues that investors’ approach to reputation is not based on strategic calculations, but more influenced by herd behavior and the psychological impact of IEO membership.

Gray argues that two key characteristics of IEOs drive investor perceptions: the proposed depth of integration and the reputation of other members. These explanatory variables are operationalized in different ways in different chapters of the book, providing a robust and comprehensive test of her central hypotheses. One measure of proposed integration uses a six-point scale that runs from no economic integration to use of a common currency. Measuring the reputation or political quality of existing members is a more delicate task. One approach that Gray uses relies on the International Crisis and Risk Group’s scale that measures the political attributes of a country such as stability, corruption, and accountability. Gray proposes that these two explanatory variables interact with one another, so that the quality of members has its most dramatic effect when the proposed level of integration is high.

After presenting the theory, the book is organized as a series of tests of its observable implications. First Gray presents a large-scale quantitative comparative analysis, which shows as predicted strong effects of political quality, proposed level of integration, and their interaction on risk premia. She then moves on to a study of the EU, which is a case of “good company” improving the reputation of new members. The EU had a powerful effect on the reputations of acceding countries through the initial round of postcommunist accessions. However, since then the reputation of the EU has been diluted, and its effect on the most recent new members has been attenuated. Gray also shows that the proposed level of integration matters, in that the EU’s effect on members of the European Neighborhood Policy is not strong. Next she turns to the effects of “bad company,” such as the ALBA. When emerging market countries join an institution that publicly challenges market ideology, investors punish them by demanding higher risk premia. Finally, she demonstrates that an IEO with a good reputation creates costs for existing members when it admits low-quality new members. For example, Germany pays higher risk premia when the EU expands to include lower-quality acceding countries.

The mix of methods and types of tests in the book provide confidence that Gray has found solid evidence for her central hypotheses. She rules out many potentially confounding factors, such as selection effects or endogeneity. She also shows persuasively that alternative explanations do not account for these relationships. For example, the legalization of IOs or policy changes prior to IO entry do not diminish the effects of good or bad company, which are substantial and of consequence.

Returning to theory, Gray argues that institutional membership matters because it signals the willingness of states to repay their sovereign debt, rather than having a concrete effect on their ability to repay: “IOs decrease uncertainty about preferences” (p. 17). Yet, exactly how this signal is sent and received remains somewhat mysterious. Gray takes pains to argue that her model is not about costly signaling that allows for strategic updating of beliefs, even though entry into many of these IEOs is indeed a costly process: “This signal’s importance is not in its costliness or in the level of commitment implied … but in its public nature” (p. 17). What, then, is the nature of the signal and how does it influence reputation? Gray introduces, but does not fully develop, the idea that investors operate “[i]n an environment of non-strategic information aggregation,” (p. 18) in which the nature of uncertainty is environmental rather than strategic (p. 34). This is an intriguing notion, but one for which the microfoundations remain undeveloped.

Gray draws loosely on theories from psychology, sociology, and behavioral economics; grounding her argument more firmly in a well-articulated framework borrowing from these disciplines would help to clarify the logic of her theory. For example, she argues that “membership in certain types of international organizations can serve as a credible and public piece of information that facilitates information processing by individual economic agents” and that “[i]nternational organizations work not as a signal but as pieces of public, visible information within a set of noisy or imperfect information” (p. 34). These claims raise many questions, and prima facie seem incompatible with repeated statements from investors that membership does in fact send a signal (pp. 34–35). How, for example, does membership provide credible information if not through a process of costly signaling? Claims of credibility are further undermined by the recognition that “these shortcuts can be a poor substitute for evaluating actual performance” (p. 34).

Gray’s high-quality, innovative empirical work makes this book a powerful addition to the literatures on IOs, on regional integration, and on sovereign debt. It begs for a theoretical exposition that clarifies the underlying logic and could lead to a new research program. A promising place to begin might be to move beyond assumptions that important concepts such as enforcement or compliance are dichotomous, either-or variables. It is true, for example, that the EU’s Stability and Growth Pact has not been rigorously enforced (p. 113). However, enforcement and compliance in the EU is a complex process involving a “management-enforcement ladder” (Jonas Tallberg, “Paths to Compliance: Enforcement, Management, and the European Union,” International Organization 56 [Summer 2002]: 609–43); coding compliance or enforcement as dummy variables misunderstands how these processes work. Building an explanatory framework that integrates informational concerns with enforcement and commitment could put Gray’s empirical findings into context.