1

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
Working Paper December 15, 2016
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) continued to analyze incentives in crisis
bargaining.
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.
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.
This 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 rival 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 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
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.

Inclusion and Exclusion: A New Mechanism in International Relations

Mechanism design causes rational agents to behave in a desired way. Players have private
information, public information and common knowledge. 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 reverse engineering of game theory.
During a game 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 desired optimized outcome. The
designer thus reaches strategic goals through a pre-planned mechanism.
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
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. These 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.
The organization of this paper will be:
1. Literature review of mechanism design, international relations and grand strategy

2.
3.
4.
5.
6.

Elucidate the mechanism design environment with mathematical notation

Define the social choice function
Describe the shortest path problem; preference elicitation; and preference aggregation
Notate the Direct and Indirect Mechanisms
Illustrate theory using case studies

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}

The Geneva Interim Agreement on the Iranian Nuclear Program

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. Five
of these secret talks were held. Participants from the United States included Deputy Secretary of
State William Burns and Jake Sullivan, Vice President Joe Bidens National Security Advisor.
U.S. nuclear negotiator Wendy Sherman was involved as was National Security Council aide
Puneet Talwer.
The names of the Iranian representatives were not disclosed. 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.

Secretary of State John Kerry went to Oman in May 2013. Two days after the UN General
Assembly meeting in September 2013, President Barack Obama and Hassan Rouhani spoke by
telephone in the first talks between U.S. and Iranian leaders in more than 30 years.
The United States did not tell any other country about the secret talks until Obama told Israeli
Prime Minister Benjamin Netanyahu in September. Obama disclosed only vague details to
Netanyahu. Obama later informed the P5+1: UK, France, China, Russia and Germany.

Policy Maker/ Mechanism Designer: United States

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

Finding: If the excluded players were included in the negotiations for the Joint Plan of Action
concerning the Iranian nuclear program, the Joint Plan of Action would not have been possible.
The United States designed a mechanism in which Israel, Saudi Arabia, Jordan and Egypt were

excluded from the negotiations to reach an optimum outcome. If these countries would have
been included, then the Joint Plan of Action would not have been reached.
Works Cited
Bajari, Patrick, Stephanie Houghton, and Steven Tadelis. 2014. "Bidding for Incomplete
Contracts: An Empirical Analysis of Adaptation Costs." American Economic Review. Volume
104:4, pp. 288-1319.
Fey, Mark and Kristopher Ramsay. 2009. Mechanism Design Goes to War: Peaceful Outcomes
with Independent and Correlated Types. Review of Economic Design. Volume 13: 3, pp.
233250.
Fey, Mark and Kristopher Ramsay. 2011. Uncertainty and Incentives in Crisis Bargaining:
Game-Free Analysis of International Conflict. American Journal of Political Science. Volume
55: No. 1, January 2011, pp. 149-169.
Fey, Mark, Adam Meirowitz, and Kristopher Ramsay. 2013. Credibility and Commitment in
Crisis Bargaining. Political Science Research and Methods. Volume 1: Issue 1, June 2013, pp.
27-42.
Harsanyi, John C. 1967. Games with Incomplete Information Played by Bayesian Players, Part
I: The Basic Model. Management Science. Volume 14: pp. 159-182.
Harsanyi, John C. 1968. Games with Incomplete Information Played by Bayseian Players, Part
II: Bayesian Equilibrium Points. Management Science. Volume 14: pp. 320-334.
Koremanos, Barbara, Charles Lipson, Duncan Snidal. 2001. The Rational Design of
International Institutes. International Organization. Volume 55: 4, pp. 761-799.
Moore, John. 1992. Implementation, Contracts, and Renegotiation in Environments with
Complete Information, in J.J. Laffont (ed.), Advances in Economic Theory. Vol. 1, Cambridge:
Cambridge University Press, pp. 182-282.
McAfee, R.P. and J. McMillan. 1987. Auctions and Bidding. Journal of Economic Literature.
Volume 25: 2, pp. 699-738.
Milgrom, P. 1989. Auctions and Bidding: A Primer. Journal of Economic Perspectives.
Volume 3: 3, pg. 22.
Myerson, Roger B. 2008. Perspectives on Mechanism Design in Economic Theory. American
Economic Review. 98:3, pp. 586-603.

Myerson, Roger B. 2007. Perspectives On Mechanism Design in Economic Theory. Nobel

Prize Lecture, December 8, 2007. Department of Economics, University of Chicago.
Myerson, Roger B. 1999. Theoretical Comparison of Electoral Systems. European Economic
Review. 671-697.
Myerson, Roger B. 1996. Economic Analysis of Political Institutions: An Introduction.
Advances in Economic Theory and Econometrics, Editors: D. Kreps and K. Wallis. Cambridge:
University Press.
Myerson, Roger B. 1995. Analysis of Democratic Institutions: Structure, Conduct and
Performance. Journal of Economic Perspectives. Volume 9: 1, Winter 1995, 77-89.
Narahari, Y. 2014. Game Theory and Mechanism Design. Singapore: World Scientific
Publishing.
Narahari, Y. 2012. Game Theory Lecture Notes (Nature of Mechanism Design Problems).
Department of Computer Science and Automation. Indian Institute of Science, Bangalore,
India. July 2012.
Satterthwaite, Mark. 1975. Strategy-proofness and Arrows Conditions: Existence and
Correspondence Theorems for Voting Procedures and Social Welfare Functions. Journal of
Economic Theory. Volume 10: April, 1975.
Vickrey, William. 1961. Counterspeculation, Auctions and Competitive Sealed Tenders.
Journal of Finance. Volume 16: 1, pp. 8-37.