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This paper provides a game-theoretic model of representative democracy with endogenous party formation. Coalition formation may occur before and after elections, and the expected payoffs from the after-election majority game affect incentives to form parties before the elections. In this way Duverger's hypothesis can be formally explained by the strategic behaviour of political elites. If politicians care primarily about private benefits, the equilibrium policy outcome under a proportional electoral system coincides with the median party's position. On the othoer hand, with quasilinear utility, the distance from the median voter outcome may be lower with plurality rule.

This paper provides a methodology to study coalition formation problems with externalities and heterogeneous players, when some subset of the players can act as “coalition developers” over time. The framework provided here allows to explicitly predict the timing of admission to coalitions, the equilibrium coalition structure and payoff distribution, as well as the equilibrium length of the admission game. We derive conditions on the availability of side-payments under which a union chooses to delay the admission of admissible countries. We show that the observed sequencing of admissions to the European Union is not consistent with the existence of perfectly competitive markets to price the admission of candidate countries. Welfare implications are derived.

In this paper we provide a cooperative solution as well as a non-cooperative analysis to study coalition formation and payoff distribution in weighted majority games. The cooperative solu- tion concept proposed here, the Anonymous Core, keeps the spirit of Core-like competition (reflecting individual rationality as well as group rationality), but it is non-empty and it is precisely characterized for every vector of weights. Agents of the same type must receive equal treatment within the winning coalitions, and some consistency is required on blocking coalitions, following a similar logic to that underlying the Von-Neumann and Morgenstern’s Stable Set. We show that in any weighted majority game every agent within the winning coalition is expected to obtain a payoff share proportional to her bargaining power. The latter is what defines the different types, and it is obtained endogenously. We introduce a non-cooperative coalitional bargaining game which resembles the rules of the game describing the formation of coalitional governments. We obtain an algorithm for the computation of all the Symmetric Markov Sub- game Perfect Equilibria of such game, and show that the set of such equilibria has a one-to-one correspondence with the Anonymous Core for homogeneous weighted majority games.

This paper introduces a general equilibrium, overlapping generations model of the principal- agent problem. Bargaining power, occupational choice, and the returns to each occupation are endogenous. Individuals live for two periods and must work when young. When old, they have a choice between becoming principals or remaining agents. Successful workers are paid high wages and may become self financed principals when old; unsuccessful workers are paid low wages and can become principals only by borrowing money. In a “high wage” equilibrium, an imperfect credit market (which makes it costly to borrow money due to, for example, moral hazard between lender and borrower) mitigates the moral hazard problem on the labor market: young workers work harder than in the static model (for a given wage) in order to succeed and become self-financed principals (the “American Dream” effect). The extra effort makes it possible for principals to pay high wages. However, there is a coordination problem. For the same parameter values that give rise to the “high wage” equilibrium, there also exist equilibria where wages are so low that even successful agents need to borrow money if they are to become principals. Effort is then low because wages are low, and because there is no “American Dream”.

Center for Law & Economics Working Paper Series, 2020 (04)

We provide a model of conflict and mass killing decisions, to identify the key variables and situations that make mass killings more likely to occur. We predict that mass killings are most likely in countries with large amounts of natural resources, institutional constraints regarding rent sharing, and low productivity of labor in other sectors. The role of resources like oil, gas and diamonds and other key determinants of mass killings is confirmed by our empirical results based on country level as well as ethnic group level analysis.

A central question in political science is how to best manage information asymmetries and commitment problems when disputes arise between states or nations. We argue that common framings of this problem miss an important feature: the institutions determining how disputes are resolved shape the incentives for nations to enter disputes. Because war can be sometimes understood as the down-side risk from entering a dispute, institutions that reduce the chances of war-fighting may induce perverse incentives to enter into disputes and militarize. We develop a simple crisis model that captures both the militarization decisions and bargaining behavior. We examine how features like direct communication and third-party involvement alter the incentives. Seemingly effective institutions that improve the chance of peace for a given distribution of military strength, can actually lower the chance of peace once one accounts for distortions to militarization decisions. To illustrate the value of this broader perspective we show how a form of intervention by a mediator concerned only with resolving the current crisis, turns out to create optimal militarization and bargaining incentives.

This article provides a theoretical and empirical analysis of how politicians allocate their time across issues. When voters are uncertain about an incumbent’s preferences, there is a pervasive incentive to “posture” by spending too much time on divisive issues (which are more informative about a politician’s preferences) at the expense of time spent on common-values issues (which provide greater benefit to voters). Higher transparency over the politicians’ choices can exacerbate the distortions. These theoretical results motivate an empirical study of how Members of the US Congress allocate time across issues in their floor speeches. We find that US senators spend more time on divisive issues when they are up for election, consistent with electorally induced posturing. In addition, we find that US house members spend more time on divisive issues in response to higher news transparency., The Journal of Politics, 79 (4), ISSN:0022-3816, ISSN:1468-2508

If voters of different countries adhere to different and deeply rooted cultural\ud norms, the country leaders may find it impossible to agree on efficient\ud policies especially in hard times. The conformity constraint -political leaders’\ud unwillingness or impossibility to depart from these norms - has resulted in lack\ud of timely intervention which has amplified an initially manageable debt crisis\ud for some European countries to the point of threatening the Euro as a single\ud currency. We show the conditions under which the introduction of a fiscal\ud union can be obtained with consensus and be beneficial. Perhaps counterintuitively,\ud cultural diversity makes a fiscal union even more desirable. Some\ud general lessons can also be drawn on the interaction of cultural evolution and\ud institutional choice.\ud

Center for Law & Economics Working Paper Series, 09/2019

Center for Law & Economics Working Paper Series, 07/2019