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Mechanism Design Theory and International Relations: Limiting or Expanding the

Number of Players for Desired Strategic Effects in the International Arena

Brent M. Eastwood, PhD

Abstract: Mathematical modeling in international relations lends a unique and original

perspective to foreign policy analysis. Mechanism design frameworks are valuable
tools to analyze the incentives and constraints of foreign policy decision-making by
government leaders and diplomats. The Principle of Inclusion and Exclusion from
discrete mathematics is a combinatorial mechanism that also explains diplomatic
behavior. This paper uses mechanism design theory and discrete mathematics to
model the diplomacy of the Iran Nuclear Agreement (Joint Comprehensive Plan of
Action). A novel duality is created between "Organizational Mechanism Designs" and
"Ad Hoc Strategic Mechanism Designs." Nobel-prize winning researchers such as
Roger Myerson have investigated similar incentive analysis constructs to elucidate
international affairs relationships. This paper attempts to expand on this foundation.

The practice of a policy maker or social planner purposefully and strategically excluding or
including n-players in a non-cooperative Bayesian game of incomplete information is a critical
breakthrough in mechanism design theory as it pertains to international relations.

Mechanism design theory and rational design can be used to elucidate and explain numerous
behavioral aspects of international institutions (Koremanos, Lipson and Snidal 2001). Most
important, mechanism design frameworks are an excellent microeconomic research method or
econometric tool to analyze the incentives and constraints of foreign policy decision-making by
government leaders and political elites.

The decision to use military force is one example of this type of decision-making analysis in
mechanisms (Fey and Ramsay 2009). Fey and Ramsay (2011) and Fey, Meirowitz and Ramsay
(2013) have successfully analyzed incentives in crisis bargaining. Slantchev (2005, 2008, 2010)
has adeptly conducted numerous analyses of formal modeling and game theoretic crisis
bargaining in international relations.

Games based on mechanism design can also be utilized to model negotiations for peace or
armistice agreements; to illustrate the formulation of alliances; to describe bargaining habits
among countries; and to explain negotiations for ending and curtailing trade sanctions.

Myerson (2008), in a key section of his Nobel Prize lecture of 2007 entitled A Simple Economy
with Moral Hazard in the Central Government, produced a critical point of departure for this
paper in terms of his analysis of political leaders who are rationally bounded by incentive
analysis and incentive constraints.
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To illustrate these constraints and incentive efficiencies, Myersons government mechanism

modeled the decision-making of an autocratic political leader who faced the moral-hazard
problem, according to Myerson (2008). Myersons model of the revelation principle defines
moral hazard as the action of an agent or player who disobeys the social plan of the mechanism
designer. The autocratic ruler, under this construct, can choose to disobey the mechanism design
in order to take, steal or expropriate capital in the government model for his own selfish or
strategic purposes (2007, pg. 337). Myerson also referred to this incentive analysis in mechanism
design as participation and informational constraint.

My paper also builds on Myersons (1995, 1996, 1999) work on governmental mechanism
design and his economic modeling of political science and democratic institutions. My
contribution to the literature is the creation of various exclusive or inclusive mechanisms to
analyze the behavior of political elites around the globe. These leaders or groups of leaders often
wish to limit the participation of certain rivals or allied governments in peace negotiations or
other interactions. Leaders can also exclude or include certain government members in
international organizations for their own strategic purposes.

What is Mechanism Design Theory?

Mechanism design often accepts similar assumptions that are made in non-cooperative games
with incomplete information games that would be familiar to game theorists (Harsanyi 1967,
1968). These games also include social choice functions and dominant strategies. Games of
mechanism design seek system-wide solutions with desirable properties and optimization.
Narahari (2014) provides a notable overview and outstanding tutorial for students of mechanism
design.

Various lecture notes from Professor Y Naraharis (2012) classes at the Indian Institute of
Science in Bangalore, India, have explained how social choice and mechanism design causes
rational agents to behave in a desired way. Players have private information, public information
and common knowledge. (Note: this paper uses the terms players or agents interchangeably).

The policy maker, also known as the designer or social planner, designs the rules of the game to
achieve a desired outcome. Some call this process of incentive analysis reverse-engineering of
game theory. Thus, international relations scholars are able to study governmental actions and
events through the incentive analysis of political elites under specific applied mechanisms.

As Narahari (2014) illustrates, during a game or iteration of mechanism design and through the
games social choice function, the policy maker extracts incomplete information from the players
or agents. Agents can choose to disclose information or to not disclose information, but the
policy maker must elicit these truthful responses or truthful information through the design of
the game. The practice of achieving the elicitation of private and truthful information is called
the revelation theorem or revelation principle, in which players reveal private information to the
policy maker. Finally, the players reach a state of preference aggregation through reporting a
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desired optimized outcome. The designer then reaches strategic goals through a pre-planned
mechanism.

In the econometric and microeconomic literature, other examples of mechanism design include
public bidding auctions (McAfee and McMillan 1987, Milgrom 1989); silent auctions (Vickrey
1961); bidding for government contracts (Bajari, Houghton, Tadelis 2014); and the matching
problem in healthcare (Satterthwaite 1975). Matching in healthcare settings refers to
mechanisms that align the interests of medical students and hospitals. For example, these
mechanisms optimize the process in which the designer matches a medical school graduate with
an internship at a teaching hospital. Another healthcare mechanism by Capps, Dranove, and
Satterthwaite (2003) initiated a market design called option demand markets for hospital
services.

Inclusion and Exclusion: A New Mechanism in International Relations

This paper is novel because it first applies games of mechanism design to international relations
and it creates a social choice function in which the policy makers purposefully limit the number
of players or expand the number of players as part of the mechanism design. So the policy maker
first determines who plays and who does not play. This decision is not trivial and it is often a part
of a policy makers grand strategy in foreign policy.

The initial stage of a mechanism design game in international relations has significant
implications for the desired outcome. The policy maker or mechanism designer is more likely to
achieve incentive compatibility leading to achievement of the revelation principle, if the policy
maker first excludes certain players, in the initial stage, or includes certain players.

This condition of exclusion or inclusion of players is notated as {n 1, 2, 3} or {n + 1, 2,

3}.

By using this practice of inclusion or exclusion, the policy maker can thus better achieve the
desired effect in peace negotiation scenarios relating to conflict resolution, armistice, alliance or
modified behavior from a group of players. Deciding whether to include or exclude players is
more likely to have all agents truthfully report their preferences or what the literature describes
as their type. Policy makers are more likely to have all players reveal type or private
information to the policy maker leading to a desired outcome from the ensuing revelation
principle. The policy maker also prefers that the players take the shortest path to the stage of
preference aggregation.

This paper will first create a novel and unique typology in international relations between what I
call Organizational Mechanism Designs and Ad Hoc Strategic Mechanism Designs. It will
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also create a new unique construct consisting of exclusionary (exogenous) mechanism design
and inclusionary (endogenous) mechanism design for international relations analysis.

In the economics literature, examples of Organizational Mechanism Design include public

bidding auctions, silent auctions, and bidding for government contracts.

Examples of Organizational Mechanism Designs in international relations include:

G + 8 Group of Nations (exclusionary or exogenous)

G + 20 Group of Nations (inclusionary or endogenous)
NATO (inclusionary but excludes Russia)
UN General Assembly (inclusionary)
UN Permanent Security Council (exclusionary)
UN Non-Permanent or rotating Members of the Security Council (inclusionary)
European Union (exclusionary)
Euro zone (exclusionary)
Trans-Pacific Partnership trade pact (excludes China)
OPEC (exclusionary)
RIMPAC (exclusionary Japan, New Zealand, South Korea, Australia, Philippines
Shanghai Cooperation Organization (exclusionary)
Eurasian Customs Union (Excludes NATO members)
Military Exercises (can exclude or include participants)

Alternatively, examples of Ad Hoc Strategic Mechanism Designs in international relations would

be:

Warsaw Pact during the Cold War (Soviet Union is designer of policy maker of
mechanism)
Non-Aligned Movement during the Cold War
Nixon and Kissinger secret negotiations with Mao Zedong in 1971-1972 (U.S. is designer
of mechanism)
Geneva Interim Agreement on the Iranian Nuclear Program of 2013-2014 (U.S. is
designer of mechanism)
Israel-Palestinian Peace Talks of 2013-2014 (U.S. is designer of mechanism)
Syria Peace Negotiations in Geneva and Montreux in 2014
Ukrainian Crisis of 2013-2014 (Russia is designer of mechanism)

These typologies will better explain a governments grand strategy based on the policy maker
who uses Ad Hoc Strategic Mechanism Design. Strategic designs achieve foreign policy
outcomes or objectives that concern the practice of obtaining conflict resolution, armistice
agreements, peace treaties, alliances and behavior modifications using economic sanctions.
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As the first step in the strategic mechanism, the policy maker decides how many players or the
number of players. The policy maker can decide to exclude certain players and include certain
players.

So that there is one Policy Maker who limits or expands the number of players. Players have
incomplete information. Players have common knowledge, private knowledge and public
knowledge.

There are n agents or players {1, 2, 3 } with N= {1, 2, 3n}

There are {n 1, 2, 3 agents} State of Exclusion or Exogenous

There are {n + 1, 2, 3 agents} State of Inclusion or Endogenous

A mechanism design that purposefully includes the permanent members (agents) of the United
Nations Security Council (United States, United Kingdom, France, China, and Russia); and
includes the Plus Two (Germany and European Union) or P5 + G +EU would be notated so
that:

= { + 1,2,3 7}

A mechanism design that would include only P5 agents that purposefully excludes Germany and
the European Union would be notated so that:

= { 1,2,3,4, 5}

Mechanism Design and the Joint Comprehensive Plan of Action with Iran

Background: Secret mid-level talks between the United States and Iran were held in Muscat,
Oman beginning in March 2013. Oman Sultan Qaboos bin Said Al Said facilitated the talks. At
least five of these secret talks were held. Participants from the United States included former
Deputy Secretary of State William Burns and Jake Sullivan, then Vice President Joe Bidens
National Security Advisor. U.S. nuclear negotiator Wendy Sherman was involved, as was National
Security Council aide Puneet Talwer. Former U.S. Department of Energy Secretary Ernest Moniz
eventually joined the negotiations.

At the early stage of the meeting process, Burns communicated a message from President Barack
Obama that the United States would consider granting Iran a curtailed domestic uranium domestic
enrichment program in exchange for some relief from economic sanctions (Rozen 2015).

The names of the Iranian representatives were not disclosed at first. According to the Associated
Press on Nov. 24, 2013, The Iranian delegation was a mix of officials the Americans had met
in March in Oman and others who were new to the talks, administration officials said. It
emerged later that Iranian Deputy Foreign Minister Ali Ashgar Khaji led the early talks from his
countrys delegation (Rozen 2015).
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Secretary of State John Kerry went to Oman in May 2013. Two days after the UN General
Assembly meeting in September 2013, Obama and Iranian President Hassan Rouhani spoke by
telephone. It was the first official communication between U.S. and Iranian political leaders in
more than 30 years.

In a critical decision that had huge strategic ramifications, the United States did not tell any other
country about the secret talks until Obama informed Israeli Prime Minister Benjamin Netanyahu
in September of 2013. Obama disclosed only vague details to Netanyahu. Obama later informed
the P5+1: UK, France, China, Russia and Germany.

Numerous months of negotiations ensued, but the United States clearly had designed a mechanism
as early as 2013 that allowed it to meet its strategic goals in nuclear security diplomacy. The main
thrust of the mechanism was its use of exclusion and inclusion of various governments during the
negotiation process. The list below describes the organization of the mechanism.

Policy Maker/ Mechanism Designer: United States

Initial Included Player/ Agent: Iran
Subsequent Included Players/Agents: P5 + 1
Excluded Players/ Agents from Negotiations of Joint Comprehensive Plan of
Action:
o Israel, Saudi Arabia, Jordan, Egypt

The following diagram, called The American Mechanism, formally models these strategies of
inclusion and exclusion, including the agents incentive analysis.
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One can see above in the green that Iran has incentive to participate in the mechanism design when
Germany also has incentive to invest in and trade with Iran. Other countries assumed to have
incentive to trade and invest in Iran are the UK, Russia, and China. Alternatively, Israel and Saudi
Arabia have no choice set, which achieves The American Mechanisms desired outcome. If the
excluded players were included in the negotiations for the Joint Comprehensive Plan of Action
concerning the Iranian nuclear program, the Joint Comprehensive Plan of Action would not have
been possible.

The Israeli government was furious at its exclusion from the process and it subsequently engaged
in a massive campaign to undermine the Iranian nuclear agreement and lobby for its rejection by
the U.S. Congress.

It turned out that German companies, whose government was promised that its companies would
benefit from increased trade with Iran, were disappointed in the economic results. According to
the Wall Street Journal on August 31, 2016, Germany was incentivized to support the nuclear
agreement, but the resulting economic development in Iran did not meet expectations.
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Many German business and government leaders had predicted the lifting of sanctions on Iran
would trigger a bonanza for their industrial firms, which want to sell Iran equipment to help rebuild
its aging infrastructure. Disappointed Germans are now blaming the shortfall primarily on
remaining U.S. prohibitions on some transactions with Iran (Alessi 2016).

The United States designed a mechanism that allowed a targeted country facing international
economic sanctions to be included as an agent. Israel and Saudi Arabia had no economic incentive
to negotiate with Iran due to Tehrans stated intention of obtaining a nuclear weapon.

This construct can apply to future international relations objectives when the United States or other
countries are looking for a strategic outcome that is designed to include or exclude agents before
official negotiations take place. It would lead one to believe that these negotiations would at first
be bilateral and in secret so the other included and excluded government are kept in the dark until
certain concessions are make. This allows the policy maker to operate in a way that takes advantage
of a governments incentive to trade and invest with a country that is out of favor with the
international community such as North Korea, Cuba, Venezuela, Myanmar and other countries
that have been the target of international economic sanctions.

Discrete Mathematics: The Principle of Inclusion and Exclusion in International Relations

To further explicate the mathematical modeling of the Iran nuclear agreement, I borrow from
discrete mathematics. Set theory and combinatorics can further explain the relationship among
various agents and both concepts can illustrate how players can be included or excluded in
international relations. The Principle of Inclusion and Exclusion, often referred to as a
combinatorial problem in discrete mathematics, is shown in the following Venn diagram with
the agents participating in the Iran nuclear agreement negotiations.
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The solution of the universal set ()=()+()() could be used to model future
negotiations when there are numerous agents or various governments that have an interest in a
negotiated outcome.

This counting mechanism found in set theory has applications in international relations that go
beyond the negotiation process involved in the Iranian Joint Comprehensive Plan of Action.
Thus, other principles in formal modeling familiar to discrete mathematicians can be used to
show membership in international organizations and to illustrate how agents can be excluded
from or included in international organizations.

To recap the findings of this paper, when agents are participating in an existing international
organization, I identify the relationship as an Organizational Mechanism Design. When a
grouping of governments is convened for ad hoc reasons such as the Joint Comprehensive Plan
of Action, I identify the relationship as an Ad Hoc Strategic Mechanism Design. Thus, the
construct consists of exclusionary (exogenous) mechanism design and inclusionary
(endogenous) mechanism design for international relations analysis.

Conclusion

Mathematical modeling in international relations lends a unique and original perspective to

foreign policy analysis. Mechanism design frameworks are valuable tools to analyze the
incentives and constraints of foreign policy decision-making by government leaders and
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diplomats. The Principle of Inclusion and Exclusion from discrete mathematics is another
counting mechanism that explains diplomatic behavior.

Most existing research in international relations is focused on historical case studies and
statistical analysis of human-generated conflict data sets. But Nobel-prize winning researchers
such as Roger Myerson have investigated incentive analysis constructs to elucidate international
affairs relationships. My paper attempts to expand on this foundation. To be sure, the use of
inclusion and exclusion in the field of international relations is quite a departure for the
uninitiated since it also builds on existing research in microeconomics, discrete mathematics, and
computer science. However, incentive analysis conducted in this manner can be intuitively
appealing to social scientists in many disciplines as it explains diplomatic activity among states
in a forthright manner.

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