“Nash-in-Nash” tariff bargaining

Quantitative Analysis of Multiparty Tariff Negotiations

“…We expect from the findings of Bagwell, Staiger, and Yurukoglu (2020b) that in the absence of the MFN requirement Nash‐in‐Nash tariff bargaining would result in inefficient over‐liberalization. But what a comparison across the findings reported in columns 1 and 2 of Table VII indicates is that, according to our estimates and in the Uruguay Round context, the degree of over‐liberalization is sufficiently important to outweigh the inefficient under‐liberalization that arises under the MFN requirement, resulting in worse outcomes for world real income under discriminatory tariff bargaining than under MFN tariff bargaining.…”

“…As all tariffs affect all countries through the model's trade equilibrium, the payoffs from each bilateral negotiation depend on the outcomes of the other bilateral negotiations. We follow Bagwell, Staiger, and Yurukoglu (2020b) and apply the solution concept of Horn and Wolinsky (1988) to this tariff bargaining problem. According to this solution, each pair of negotiating countries maximizes its Nash product given the actions of the other pairs.…”

“…The concept is referred to as a “Nash‐in‐Nash” solution, because it can be thought of as a Nash equilibrium between separate bilateral Nash bargains 3 . As Bagwell, Staiger, and Yurukoglu (2020b) discuss, the Nash‐in‐Nash approach is not without limitations when applied to tariff bargaining, but it does offer a simple characterization of simultaneous bilateral bargaining outcomes in settings with interdependent payoffs. The approach thereby makes the analysis of bilateral tariff bargaining in the GATT/WTO context tractable in a quantitative trade model.…”

“…99 The described synthetic tariff‐bargaining game is a “generalized game,” since, due to participation constraints, the feasible strategy set for one player is affected by the choices of other players. For further discussion, see Bagwell, Staiger, and Yurukoglu (2020b). …”

“…22 Bagwell, Staiger, and Yurukoglu (2020b) developed a theoretical analysis of equilibrium bilateral tariff bargaining in a three‐country trade model and show that, due to the nature of the externalities associated with discriminatory tariffs, tariff bargaining without MFN always results in inefficient over‐liberalization. In their working paper version, Bagwell, Staiger, and Yurukoglu (2018) showed that tariff bargaining under an MFN rule typically leads to inefficient outcomes that can exhibit either over‐ or under‐liberalization.…”