Bargaining Power and the Iran Deal

Today’s post is not an attempt to give a full analysis of the Iran deal.[1] Rather, I just want to make a quick point about how the structure of negotiations greatly favors the Obama administration.

Recall the equilibrium of an ultimatum game. When two parties are trying to divide a bargaining pie and one side makes a take-it-or-leave-it offer, that proposer receives the entire benefit from bargaining. In fact, even if negotiations can continue past a single offer, as long as a single person controls all of the offers, the receiver still receives none of the surplus.

This result makes a lot of people feel uncomfortable. After all, the outcomes are far from fair. Fortunately, in real life, people are rarely constrained in this way. If I don’t like the offer you propose me, I can always propose a counteroffer. And if you don’t like that, nothing stops you from making a counter-counteroffer. That type of negotiations is called Rubinstein bargaining, and it ends with a even split of the pie.

In my book on bargaining, though, I point out that there are some prominent exceptions where negotiations take the form of an ultimatum game. For example, when returning a security deposit, your former landlord can write you a check and leave it at that. You could try suggesting a counteroffer, but the landlord doesn’t have to pay attention—you already have the check, and you need to decide whether that’s better than going to court or not. This helps explain why renters often dread the move out.

Unfortunately for members of Congress, “negotiations” between the Obama administration and Congress are more like security deposits than haggling over the price of strawberries at a farmer’s market. If Congress rejects the deal (which would require overriding a presidential veto), they can’t go to Iran and negotiate a new deal for themselves. The Obama administration controls dealings with Iran, giving it all of the proposal power. Bargaining theory would therefore predict that the Obama administration will be very satisfied[2], while Congress will find the deal about as attractive as if there were no deal at all.

And that’s basically what we are seeing right now. Congress is up in arms over the deal (hehe). They are going to make a big show about what they claim is an awful agreement, but they don’t have any say about the terms beyond an up/down vote. That—combined with the fact that Obama only needs 34 senators to get this to work—means that the Obama administration is going to receivea very favorable deal for itself.

[1] Here is my take on why such deals work. The paper is a bit dated, but it gets the point across.

[2] I mean that the Obama administration will be very satisfied by the deal insofar as it relates to its disagreement with Congress. It might not be so satisfied by the deal insofar as it relates to its disagreement with Iran.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s