A Proliferation-Perverse Outcome in the Market for Nuclear Goods
A Proliferation-Perverse Outcome in the Market for Nuclear Goods Ms. Eleanor Cooper Department of Economics Washington University in St. Louis
A Nuclear Renaissance • New market conditions • New players • New contracts
Trade-offs Question: What happens when a nuclear goods seller balances monetary gains against proliferation concerns?
Answer: An inefficient, proliferation-perverse outcome
Transaction • Single seller offers a contract consisting of inspections and a price • Buyers decide whether to accept or reject the contract ▫ Buyers with “good” intentions ▫ Buyers with “bad” intentions
The Model Preferences for each player exhibits the trade-off between the price and rigor of inspections accompanying the sale of nuclear goods
The Ideal: Full Information • Efficient outcome for the seller • Buyers just prefer to purchase from the seller than opt for black market nuclear goods
Figure 1: Full Information Solution Set = full information solution
= bad buyer’s zero utility curve = good buyer’s zero utility curve = seller’s preferences w.r.t. good buyers
--- = seller’s preferences w.r.t. bad buyers
The Reality: Asymmetric Information • Sort between buyer types with two sets of constraints ▫ Keep buyers in the market ▫ Ensure that each buyer type takes the contract designed for it
• Inefficient outcome for the seller
Figure 2: Asymmetric Information Solution Sets = full-information solution = sub-optimal sorting contracts = sorting solution
= bad buyer’s zero utility curve = good buyer’s zero utility curve
--- = bad buyer’s positive utility curve
A Sorting Solution under Full vs. Asymmetric Information Contract Level of Inspections: ib*ig
(inspections premium)
Individual Player Utility Levels: Us*<Us Ub*>Ub Ug*=Ug
(utility gain) Key: g = “good” intentions b = “bad” intentions
Surprising Implications Based on Rational Expectations • Inefficient inspections regimes result from the seller’s conflicting preferences for profit and non-proliferation Reflected in large variation in required rigor of inspections The presence of countries with “good” intentions increases the risk of proliferation
A Nuclear Renaissance • New market conditions • New players • New contracts
Trade-offs Question: What happens when a nuclear goods seller balances monetary gains against proliferation concerns?
Answer: An inefficient, proliferation-perverse outcome
Transaction • Single seller offers a contract consisting of inspections and a price • Buyers decide whether to accept or reject the contract ▫ Buyers with “good” intentions ▫ Buyers with “bad” intentions
The Model Preferences for each player exhibits the trade-off between the price and rigor of inspections accompanying the sale of nuclear goods
The Ideal: Full Information • Efficient outcome for the seller • Buyers just prefer to purchase from the seller than opt for black market nuclear goods
Figure 1: Full Information Solution Set = full information solution
= bad buyer’s zero utility curve = good buyer’s zero utility curve = seller’s preferences w.r.t. good buyers
--- = seller’s preferences w.r.t. bad buyers
The Reality: Asymmetric Information • Sort between buyer types with two sets of constraints ▫ Keep buyers in the market ▫ Ensure that each buyer type takes the contract designed for it
• Inefficient outcome for the seller
Figure 2: Asymmetric Information Solution Sets = full-information solution = sub-optimal sorting contracts = sorting solution
= bad buyer’s zero utility curve = good buyer’s zero utility curve
--- = bad buyer’s positive utility curve
A Sorting Solution under Full vs. Asymmetric Information Contract Level of Inspections: ib*ig
(inspections premium)
Individual Player Utility Levels: Us*<Us Ub*>Ub Ug*=Ug
(utility gain) Key: g = “good” intentions b = “bad” intentions
Surprising Implications Based on Rational Expectations • Inefficient inspections regimes result from the seller’s conflicting preferences for profit and non-proliferation Reflected in large variation in required rigor of inspections The presence of countries with “good” intentions increases the risk of proliferation
