An experimental game theoretic analysis of the Uruguay round trade negotiations: an efficiency approach.

Author:Redmond, Willie J.
 
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  1. INTRODUCTION

    The objective of this study is to behaviorally test the Multilateral Bargaining (MB) model, due to Rausser and Simon (1991), in an experimental laboratory setting. Previous studies have used the Rausser and Simon MB model to simulate a number of negotiation environments. Two studies, Adams, Rausser and Simon (1996) and Thoyer, Morardet, Rio, Simon, Goodhue, and Rausser (2001) examined the complexities of water negotiations, in California and South West France, respectively. Yet another, Pinto and Harrison (2003) used the model to study coalition formation in the recent environmental negotiations to reduce carbon emissions.

    Redmond (2003) employed the MultiRegional Trade (MRT) computable general equilibrium model, due to Harrison, Rutherford and Tarr (1997), to empirically generate the welfare changes that would accrue to the primary players in the Uruguay Round Negotiations on Agriculture, as the levels of the targeted policy instruments were reduced. Export subsidies, production subsidies, and import tariffs were the policy instruments in question. With this information, empirical estimates of the primary negotiators' preferred policies were calculated. Subsequently Redmond (2006) uses those preferred policies to calibrate the MB model, thus tying the impact of the economic policies with the negotiation process in which the final policies were determined.

    One issue that is a concern when studying this area is that there is a general lack of long time-series data on negotiation outcomes under stationary institutional conditions. Likewise there is but a modest amount of cross-section data on multilateral negotiation environments. For example, the outcome of the targeted study, the Uruguay Round Negotiations on Agriculture, provides only a single data point in the strategy space. Redmond (2004) addressed that problem by taking the empirical estimates that were derived from the model, and then using the experimental laboratory to create a controlled negotiation environment that was recreated and repeated a significant number of times. A specific goal of that study was to test the impact that different strategy combinations had on the final payoffs in the game. In this study a similar experimental approach is used, however now the degree of efficiency that is realized from the process by the experimental players, is the primary focus.

    We will proceed in the following manner. Section Two, we summarize previous experimental work in the area. Section Three addresses the design and significance of our experiments, explaining our primary concerns and the relevance to actual negotiation environments. In Section Four we discuss findings from the study and finally in Section Five we discuss our conclusions.

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  2. EXPERIMENTAL LITERATURE

    Preliminary experimental research with the MB model has been documented in Harrison and McCabe (1991). This paper is consistent with that study as it proposes a basic design that contains three primary features. The first of these features is to furnish players with unpaid training against simulated opponents. This is a common feature of many experiments, by which players are given a rehearsal period to familiarize themselves with the operation of the particular institution with which they will be performing, without learning anything about the behavior of the other players.

    The second common feature in the design involves the manner of compensating the players. The authors use a duplicate cardinal tournament method that grants the players a share of a fixed pie based on their performance relative to others in comparable positions. This method of payment motivates the player to sustain rational behavior all the way to the end of the exercise, thus limiting the payoff dominance problem that is chronicled in Harrison (1989). Also, instead of the direct payment method where the total payment is endogenous to the experiment, this method serves to predetermine the total amount of money that is paid out per session. Therefore the experimenter can plan a series of experiments that satisfy budget restrictions and guarantee that incentives are comparable for all players. The third common feature is the number of agents per game. The authors proposed a preliminary benchmark of five agents, though their ultimate goal was to assess institutions that have many more participants.

    In this study we incorporate the basic design framework of the MB experiments to date. However, we retain several key extensions that were introduced in Redmond (2004). First, we propose to test the MB model in the laboratory by calibrating it to actual negotiation circumstances. We do this ex-post with the

    Uruguay Round Negotiations on Agriculture by evaluating proxies for the actual policy options introduced in the Round, and using the utility parameters calculated in Redmond (2006) from the MultiRegional Trade CGE model. Second, as three primary issues were under discussion in the Agricultural Negotiations, we expand the scope of the literature to include three-dimensional choices, instead of the two dimensions of the previous work. The integration of these characteristics into our design aids us in addressing our primary research questions:

    * How closely do the payoffs as received by the laboratory players (as measured by efficiency) approximate the maximum payoffs as prescribed by the model?

    * How efficient are the experimental players in this study as compared to similar studies with a less complex negotiation framework?

    We are primarily interested in how self-interested players, who are provided with a suitable incentive structure, will perform in our negotiation environments. In our treatment we examine a scenario where the players are assigned the roles of the four...

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