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The Application of Game Theory to Brexit Negotiations

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[Technical Report, Research Paper]

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Following a UK-wide referendum in 2016 and a longstanding internal discussion regarding the countrys withdrawal from the European Union, the UK left the EU on 31 January 2020, and has now entered an 11-month transition period. Meanwhile, the UK will decide whether to comply with EU regulations, which provide single market trade privileges across 28 member nations, and the EU will finalize trade deals granted to the UK once the transition ends. This paper models the decision of these two parties the United Kingdom and the European Union, as a two-player, perfect information sequential game. The UK is a firstmover to decide whether to accept or reject EU regulations, and the EU decides whether to grant a good or a bad trade deal as a response. Lastly, the UK gets to make a call on whether to accept the deal or end the transition period with no deal. This paper shows the equilibrium outcome of the game to be that the UK leverages on its firstmover advantage and maximize its payoffs by rejecting EU regulations and leaving the EU with no option but to grant a good free trade agreement to the UK to preserve its payoff. This paper also discusses the possible strategic moves possibly adopted by the EU and highlights that the EU could alter the equilibrium outcome by combining a threat to punish the UK for rejecting the regulations and a promise to award the UK for complying with the regulations.

Subject Categories:

  • Government and Political Science
  • Operations Research

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[A, Approved For Public Release]