optimal opacity in international negotiations · both negotiation parties obtain a positive rent....

Optimal Opacity in International Negotiations

Optimal Opacity in International NegotiationsMarcel ThumCalcutta, 7-9 January 2019

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Q&ATake-away message

Q.

Does it pay to generate opacity about the valuation of an agreement in international negotiations?

A.

Yes. Both negotiation parties obtain a positive rent

Opacity implements the efficient solution (despite incomplete information)

Credit: Council of the European Union


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Q&AThe basic idea

— Country A obtains benefit a = 1 from an international agreement — Country B’s gross benefit is 0— Country B makes an ultimatum offer to country A

Payment y from A to B in exchange for signing the agreement

0 1https://www.freepik.com

Country A Country By = 1


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Q&AThe basic idea


Payment y from A to B in exchange for signing the agreement— Country A sends a delegate with positive acceptance cost c


Country A Country By = 1 - c

c


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Q&AThe basic idea


Payment y from A to B in exchange for signing the agreement— Country A sends delegate with opaque acceptance cost c


Country A Country Bc

y = ?


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Layout of the Talk

— Motivation— Literature on Opacity / Transparency in International Negotiations— The Setup of the Model— Main Results— Comparative Statics


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MotivationOpacity in International Negotiations

— TTIP Negotiations: EU – US, started in 2013— Pressure from NGOs to act more transparently— EU Commission:

−Promised to report intermediate results after the end of each trade round

− In October 2014, the Council of Ministers disclosed the Commission's negotiating directives.

−Also made documents describing the EU's negotiating positions regarding regulatory issues publicly available


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MotivationOpacity in International Negotiations

— US Ambassador to the UN:− John R. Bolton

−Heather Nauert

“She has opinions, so many opinions … “(Boston Globe, 2000)

Gage Skidmore - https://www.flickr.com/photos/gageskidmore/16471115647/in/faves-54050720@N05/https://www.state.gov/r/pa/ei/biog/bureau/271443.htm

https://www.flickr.com/photos/gageskidmore/16471115647/in/faves-54050720@N05/


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MotivationOpacity beyond International Negotiations

— Ransom negotiations in case of kidnapping −Total turnover per annum: ≈ £ 1 b. −K&R insurance market−Professional negotiators often act in the background−Kidnappers must be left in the dark about the entity in charge of

paying the ransom


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LiteratureDelegation as a commitment device in negotiations

— Schelling – The Strategy of Conflict, 1960.

— Design choices−Type of delegate−Delegate’s decision rights−Delegate’s incentives− For a survey, see Sengul, Gimeno & Dial (2012 JoMgmt).

− Strategic delegation (1st stage) and Nash bargaining (2nd stage)[Jones (1989 JEBO), Burtraw (1992 EcLet)]

− Commitment can be revoked with some probability [Ellingsen & Miettinen (2008 AER)] or decay stochastically [Ellingsen & Miettinen(2014 GEB)]


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LiteratureDelegation and beliefs

— Delegate is better informed than delegator (but differs in objectives) [Alonso & Matouschek (2008 RES)]→ exogenous vs. endogenous information asymmetry

— Bayesian persuasion games [Kamenica and Gentzkow (2011 AER)]→ manipulate beliefs


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LiteratureTransparency / Opacity

— Open vs. closed-door bargaining−Principal can accept/reject intermediate or final offers

[Perry & Samuelson (1994 RandJE)]−Principal is informed about the proposer or the outcome

[Stasavage (2004, IO), Fingleton & Raith (2005, JLEO)]

— Here−Opacity is chosen!−On average, delegate has identical preferences as government.−But precise policy stance remains opaque.−Models of bargaining with incomplete information

Myerson & Satterthwaite (1983, JET)Chatterjee & Samuelson (1983, OR)


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Setup of the ModelStructure

— Country A obtains benefit a = 1 from an international agreement . — Country B’s gross benefit is 0.

— Stage 1: −Country A chooses cumulative distribution function F(v)−The delegate’s valuation v is a random draw from F(v)

— Stage 2:−Country B is the proposer−Country B demands a payment y from country A−Demand is accepted if and only if y ≤ v


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Setup of the ModelDistribution Function

— 𝐹𝐹 𝑣𝑣 is selected from a set F of feasible distributions

— Each element 𝐹𝐹 𝑣𝑣 ∈ F is continuous and differentiable except for possibly a finite number of mass points 𝜌𝜌 𝑣𝑣

— Support of 𝐹𝐹 is an interval which is a subset of [0, 𝑧𝑧] with 𝑧𝑧 > 1

— Restriction 𝐸𝐸𝐹𝐹 𝑣𝑣 ≡ ∫𝑣𝑣=0𝑧𝑧 𝑣𝑣 𝑑𝑑𝐹𝐹(𝑣𝑣) ≥ 1


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Setup of the ModelDistribution Function

— Restriction 𝐸𝐸𝐹𝐹 𝑣𝑣 ≡ ∫𝑣𝑣=0𝑧𝑧 𝑣𝑣 𝑑𝑑𝐹𝐹(𝑣𝑣) ≥ 1

vz

1

1 2

F(v)


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Setup of the ModelStage 2

— Country B chooses 𝑦𝑦 to maximize 𝐸𝐸𝜋𝜋𝐵𝐵 = 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑦𝑦 ≤ 𝑣𝑣 � 𝑦𝑦 (1)

— Tie-breaking assumptionIf several 𝑦𝑦 yield the same maximized value of (1) then B chooses the smallest 𝑦𝑦 from this set.

— Denote B’s choice of 𝑦𝑦 by 𝜃𝜃 𝐹𝐹 .


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— Country A‘s expected payoff𝜋𝜋𝐴𝐴 𝐹𝐹 = 1 − 𝜃𝜃 𝐹𝐹 � {1 − 𝐹𝐹 𝜃𝜃 𝐹𝐹 − 𝜌𝜌 𝜃𝜃 𝐹𝐹 } (2)

A‘s payoffin case of acceptance

Probability thattrue value of v issmaller than 𝜃𝜃 𝐹𝐹

Probability thatdelegate accepts


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— Country A‘s expected payoff𝜋𝜋𝐴𝐴 𝐹𝐹 = 1 − 𝜃𝜃 𝐹𝐹 � {1 − 𝐹𝐹 𝜃𝜃 𝐹𝐹 − 𝜌𝜌 𝜃𝜃 𝐹𝐹 } (2)

vz

acce

ptan

ce p

rob 1

F( )θ

F( )-θ ρ

1θ( )F

ρ

2

F(v)


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Main ResultsSummary I

— Country A chooses a distribution of valuations of the following type

𝐹𝐹𝑥𝑥 𝑣𝑣 = �0 for 𝑣𝑣 < 𝑥𝑥

1 −𝑥𝑥𝑣𝑣

for 𝑣𝑣 ∈ [𝑥𝑥, 𝑧𝑧)

1 for 𝑣𝑣 = 𝑧𝑧

vz

1

0.75

10.5

F(v)


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Main ResultsSummary II

— In equilibrium, the delegates expected type fulfills 𝐸𝐸𝐹𝐹𝑥𝑥 𝑣𝑣 = 1— Country B makes an offer targeting the lowest possible valuation— Acceptance probability =1 (efficient solution)— Both countries receive positive rents

vz

1

0.75

10.5

F(v)


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Main ResultsIntuition I

— Family of distributions is feasible for country A.— At least one function from the family passes through each point.— For a given function, the expected payoff is the same for each

demand

𝑥𝑥

1 −𝑥𝑥𝑧𝑧


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Main ResultsIntuition II

— Tie breaking assumption: B chooses 𝑥𝑥— Payoffs 𝜋𝜋𝐵𝐵 = 𝑥𝑥 and 𝜋𝜋𝐴𝐴 = 1 − 𝑥𝑥

𝑥𝑥

1 −𝑥𝑥𝑧𝑧


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Main ResultsIntuition III - which function is chosen?

— Constraint: expected valuation of the delegate ≥ 1ln 𝑧𝑧 � 𝑦𝑦 − ln 𝑥𝑥 � 𝑦𝑦 + 𝑦𝑦 ≥ 1

— Country A selects function with 𝐸𝐸𝑣𝑣 = 1

𝑣𝑣∗

𝐸𝐸𝑣𝑣 < 1: not feasible

𝐸𝐸𝑣𝑣 > 1: feasible

𝐸𝐸𝑣𝑣 = 1


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Main ResultsIntuition IV – why not some other function?

— Arbitrary but feasible �𝐹𝐹— Country B chooses �𝑦𝑦 and obtains an expected payoff of �𝜋𝜋𝐵𝐵— 𝐹𝐹�𝑥𝑥 yields same payoff for B as �𝐹𝐹— But along 𝐹𝐹�𝑥𝑥, B chooses �𝑥𝑥, which is preferred by A over �𝑦𝑦


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Comparative StaticsHighest feasible type z

— An increase in z reduces the equilibrium demand of B— Even though z is never selected in equilibrium, A can extract more

rents


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Comparative StaticsA’s valuation and B’s cost

— A‘s valuation could be a random draw from a distribution and the realization remain private information.

— Nothing changes as long as the valuation is higher than the equilibrium offer 𝑣𝑣∗.

— If A has a choice whether to send a delegate, this choice might be informative.

— B’s cost of accepting a deal: 𝑝𝑝


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Conclusion

— In ultimatum bargaining with incomplete information, the delegator may benefit from some opacity about the delegate's valuation of an agreement.

— Optimally designed opacity can even generate an efficient solution.

— While the existing literature has focused on the delegation to tough negotiators, we have shown that the protection of rents can also be achieved through the opacity of the delegate's preferences.


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Conclusion

— Trade-offexperienced negotiators are also more transparent in terms of their policy stance.

— ExtensionUnder which conditions can opacity be used in addition to strategic delegation?

— Shortcomings−Complexity of international negotiations− Issue linkages− Learning about policy stances−Delegates responding to multiple principals

Optimal Opacity in International Negotiations

optimal opacity in international negotiations · both negotiation parties obtain a positive rent....

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