US negotiators have been keen to expand the scope of the Iranian nuclear deal (JCPOA) to include activities such as its missile program. Iran has refused but may wish to reconsider in light of recent economics research on the theory of bargaining and negotiation.
In 1983, economists Dr. Roger Myerson and Dr. Mark Satterthwaite published a paper on how bargaining breaks down. Suppose that Salih possesses a ring that Maryam is considering buying. Each knows how much the ring is worth to themselves, but not to the other person, known as “asymmetric information.”
As they bargain over what price Maryam should have to pay for the ring, the asymmetric information creates an incentive for each player to misrepresent how much the ring is worth to them. We all follow this process when haggling in a local sooq: “I’ll buy that ring, but it’s not really my style, so you’ll have to seriously cut the price.”
If everyone knew that the ring was worth more to Maryam than it was to Salih (symmetric information), then they would eventually arrive at a deal where Maryam buys the ring for an amount that exceeds Salih’s valuation but is still lower than Maryam’s. This ensures that both are better off than if Salih keeps the ring.
But under asymmetric information, when Maryam is refusing to raise her bid, or Salih is refusing to lower his ask, neither is sure if the other party’s obstinance is because they have really reached their limit, or if they are just posturing.
The Myerson-Satterthwaite theorem shows how the posturing that asymmetric information breeds could lead to a breakdown of negotiations, where the person valuing the goods more fails to acquire it.
The original JCPOA represented bargaining in an asymmetric information environment. Iran didn’t know how valuable the limitations to its nuclear program were to the US, and the US didn’t know how valuable an unrestricted nuclear program was to Iran.
The posturing contributed to the protracted nature of negotiations. It made striking the deal considerably more difficult, in line with the Myerson-Satterthwaite theorem.
Moreover, when Donald Trump assumed office and the White House’s interests changed, the asymmetric information also played a role in the US’ decision to withdraw from the agreement.
As the new American and Iranian governments re-enter negotiations, one of the key demands presented by US president Joe Biden has been that the new deal should be expanded to cover other aspects of concern. To the US and its regional partners this includes Iran’s missile program.
Iran has responded that such demands are unacceptable, and that the departure point for the new deal should be the resumption of the old deal in its entirety.
I recently coauthored a paper titled: “The efficiency of negotiations with uncertainty and multi-dimensional deals” with several colleagues, building on previous work by two members of the authorship team (Dr. Matthew Jackson and the late Dr. Hugo Sonnenschein).
The paper was about how the problem flagged by the Myerson-Sattherwaite theorem can be overcome by allowing the trading parties to expand the scope of their bargaining to include other goods.
By allowing two people trading over a good to introduce other goods into the bargain, and to make offers for bundles of goods together is better than creating sequences of offers that cover each good alone. Bundling means they are more likely to reach a mutually satisfactory agreement. In the case of Salih and Maryam, if they can’t agree on a price for the ring, allowing them to include a mobile telephone, a coupon for a restaurant meal, or a wristwatch in the negotiations makes a deal more likely.
The key conclusion is that allowing the scope of negotiations to be expanded guides agents away from posturing and manipulating their share of the pie, toward deals that maximize their mutual gains from trade.
Through this lens, the JCPOA’s original philosophy – using an agreement on the nuclear dossier as a precursor for subsequent isolated deals on the missile program and other issues – was arguably flawed.
A lasting commitment would have been more likely had its scope been wider, and both sides could arguably benefit now from agreeing to broaden the scope.
Admittedly, the theory we developed did not include the fact that negotiations can become unwieldly when they involve too many elements. The original JCPOA is 159 pages, so articulating an offer in a negotiation that also spanned missiles would be a challenge, let alone getting it accepted.
However, given the widespread belief among experts that the present negotiations will fail, negotiators may wish to try this alternative approach. When their children refuse to eat their greens, and they instinctively respond: “if you finish your plate, I’ll give 20 extra minutes of screen time,” they might be reminded of the missed opportunity.