Political Economy.

Class 5

Alessandro Riboni

Master in Economics, 2019-20

The Median Voter Approach

I Condorcet winner is a policy that beats any other policy in a

pairwise vote under majority rule.
I Open Agenda: Players vote over pairs of policy alternatives,
such that the winning policy in one round is posed against a
new alternative in the next round and the set of alternatives
includes all feasible policies
I MV Theorem: If voters have single-peaked preferences, the
Condorcet winner coincides with the median-ranked bliss point
pm . Alternative pm is the unique equilibrium policy under the
open agenda majoritarian rule.
I Median Voter (MV) approach is very popular in political
economy (Meltzer and Richard, 1981, and many others).

2 / 33
Beyond the Median Voter

I Status quo plays no role in the MV Theorem

I MV not suited to study multidimensional problems (e.g.
redistribution)
I MV approach not geared to analyze the consequences of
varying:
I constitutions (Persson, Roland and Tabellini, 1997, 2000)
I budget rules (Poterba, 1994)
I confidence requirement (Diermeier and Feddersen, 1998)

3 / 33
Legislative Bargaining

I Most public policies are negotiated by group of individuals

(e.g., legislatures, but also monetary policy boards)
I Status quo is reversion point in case of disagreement
I Agenda is often restricted:
I Some players have agenda-setting power (Committee chairs,
the President, the Prime Minister, etc).1
I Others have gatekeeping powers.2
I Some players have veto power3

1
Agenda-setting power is the ability to decide the alternatives that are put
to a vote.
2
Gate-keeping power can protect the status quo by not allowing the debate.
3
A player has veto power if her consent is necessary for a shift in policy.
4 / 33
Outline for Today

I We consider a committee N = {1, 2, ..., n} making decisions.

I We do not study the cooperative/axiomatic approach (e.g.,
Nash Bargaining), but focus on non-cooperative approach
I Perfect Information
I We first study a pure distribution setting: e.g. divide dollar
problem (Baron and Ferejohn, 1989).
I It is possible to transfer utility freely among committee
members.
I We later study decisions over public policy

5 / 33
Bargaining. Rubinstein (1982)
I First consider two individuals who try to allocate one dollar
between them. When agreement is reached, it is irreversible.
t=1,2,..., ∞
I Players A and B take turns making offers on the dollar’s
division.
I A makes the offer in odd periods, B in even periods.
I At t = 1 A makes an offer of a split to B: (x1 ; 1 − x1 ) with
x1 ∈ [0, 1]. If accepted the game ends and the dollar is
divided. If not, at t = 2 B makes an offer (y2 ; 1 − y2 ). If A
accepts, the game ends, otherwise, at t = 3 there is another
offer by A, etc etc.
I If the split (xt ; 1 − xt ) is accepted at time t, players utilities
are δAt−1 xt and δBt−1 (1 − xt ).
I δi (players’ patience) is a measure of bargaining frictions

6 / 33
Bargaining. Rubinstein (1982)
I Complete sequence of moves that precedes a node is called
history of the game up to that point.
I A pure strategy for i is a contingency plan for every possible
history
I Let σ denote the strategy profile (i.e., set of strategies for
each player)
I We look for a Subgame Perfect Equilibrium.
I That is, there is no history at which a player benefits by
deviating from her prescribed strategy
I At each node, the action taken by the player must maximize
his payoff, given the subsequent strategy combination.
I For instance, i accepts an offer if the utility from this offer is
≥ δi Vi (σ) where Vi (σ) is the continuation value (expected
payoff of going to next period)
I and rejects otherwise
7 / 33
Bargaining. Rubinstein (1982)

I Suppose that there are only two periods. Solve backwards.

I In the second period, B has the “last word” and proposes
(0,1): B proposes and obtains all the dollar.
I Foreseeing this, A at t=1 proposes (1 − δB , δB ) so that B is
indifferent between accepting and rejecting.
I With an infinite horizon, nobody has the “last word”.
I Expected payoff is more complicate to compute since we
cannot use backwards induction.

8 / 33
Bargaining. Rubinstein (1982)

Suppose that the horizon is infinite. There is a unique SPE in

which player A proposes (x, 1 − x)

1 − δB
x=
1 − δA δB
Player B accepts any division giving her at least 1 − x.

Player B proposes
1 − δB
y = δA
1 − δA δB
Player A accepts any proposal giving him at least y .

Bargaining ends with no delay and the split is (x, 1 − x)

9 / 33
Bargaining. Rubinstein (1982)

I We prove that the described strategies are a SPE.

I We use the one-shot deviation principle (see
Fudenberg-Tirole, p. 109).
I We check that no player can make a profitable one-shot
deviation (i.e., a deviation that takes place in a single stage).
I After the deviation, all individuals (including the one who
deviates) are supposed to play according to the posited
equilibrium.

10 / 33
Bargaining. Rubinstein (1982)

I We use the posited strategy profile to compute the

continuation values after a (one-shot) deviation.
I If B refuses, tomorrow he will propose y (which is accepted)
and B will obtain 1 − y . In present terms B gains δB (1 − y )
or δB (1 − δA x) which is equal to 1 − x. Thus, B does not
strictly gain from a rejection.
I A has no incentive to deviate either: if A proposes something
that it is rejected, she will get y tomorrow, or δA y in present
terms. Since δA y = δA2 x, A is strictly better off with x.
I We have not proved uniqueness (if interested, read
Fudenberg-Tirole, p. 115).

11 / 33
Bargaining. Rubinstein (1982)
I It helps to be patient. Note that player A‘s x is increasing in
δA and decreasing δB . The reason is that if you are more
patient, you can afford to wait until you have the bargaining
power (i.e. get to make the offer).
I The first player to make an offer has an advantage. If
δA = δB → 1 there is equal split: (1/2;1/2)
I Outcome is efficient (no delay)
I In a SPE strategies could in principle depend on past history
(i.e., all prior moves: past proposals and voting strategies).
I Here instead, the equilibrium is such that agents use stationary
strategies. The proposer makes the same offer regardless of
past history. Similarly, each player accepts or rejects according
to the same criterion, regardless of the history.4

4
Def: Stationary Markovian strategies depend on a small set of state variables, and
do so in a way that’s insensitive to the passage of calendar time.
12 / 33
Legislative Bargaining (Baron and Ferejohn, 1989)

I Consider a legislature N = {1, 2, ..., n} with n odd

I The legislature has to decide (under simple majority) how to
allocate a given amount of resources (normalized to 1).
I t = 1, 2, ..., ∞
I Linear utility and δ (same for all i) measures the patience of
the legislator: one unit of consumption tomorrow gives an
utility of δ today.
I At the beginning, each member has a probability 1/n of being
recognized as agenda setter.
I If recognized,
Pn i makes a proposal x i , where x i = (x1i , ..., xni )
i
such that j=1 xj ≤ 1.
I Default option is 0 for all i.

13 / 33
Legislative Bargaining under Closed Rule

I Under a CLOSED RULE, the proposal is voted immediately

against the status quo.
I If it is approved, the allocation is implemented.
I If not, individuals get zero in the current period but in the
next period nothing prevents the legislature from
reconsidering the issue.
I In the next period, a new agenda setter is recognized to make
a proposal, and so on.

14 / 33
Legislative Bargaining under Closed Rule

15 / 33
Legislative Bargaining

I Note that individuals need to form expectations as to which

future proposals will be made and how members will vote.
I These expectations allow each member to compute the
continuation value from further bargaining.
I In a one-session legislative bargaining, the proposal must
make a majority better off relative to the default.
I But when time is infinite the proposal must make a majority
better off with respect to the continuation value from further
bargaining.

16 / 33
Legislative Bargaining (Baron and Ferejohn, 1989)
I As in Rubinstein (1982) we look for Subgame perfect
equilibria.
I In addition, we also require that players use undominated
strategies: Players vote as if they were pivotal.
I This rules out pathological equilibria in which all players vote
for a proposal they do not like because a single rejection
would not make a difference.
I Is this enough to have a unique equilibrium as in Rubinstein
(1982)?
I No! Any distribution of the dollar can be sustain in a SPE
provided that discount factor is sufficiently large (Proposition
2 in Baron and Ferejohn, 1989)
I We further refine the set of equilibria and focus on stationary
strategies.

17 / 33
Legislative Bargaining (Baron and Ferejohn, 1989)

I For any set Y, let ∆Y denote the family of probability

distributions over Y.
I X is the set of feasible allocations
X
X = {(x1 , x2 , ..., xn ) : xi ≤ 1 and xi ≥ 0 for all i}
i

I A stationary strategy σi for any player i ∈ N consists of

I a mixed proposal πi ∈ ∆X to be used at every period in
which i is the selected agenda-setter, and
I a voting strategy vi : X → [0, 1] where vi (x) is the probability
i votes to accept a proposal x .
I An undominated SPE in stationary strategies will be called
stationary equilibrium.

18 / 33
Legislative Bargaining under Closed Rule

I In Proposition 3, Baron and Ferejohn (1989) show that there

exists a stationary equilibrium that looks as follows:
I A member recognized as agenda setter proposes for herself

δ(n − 1)
1−
2n
and offers
δ
n
to (n − 1)/2 other members at random
I Each member votes for any proposal in which at least δ/n is
received.
I The proposal is then accepted in the first session.

19 / 33
Legislative Bargaining under Closed Rule

I We show that there are no one-shot deviations.

I First, we show that an individual that is offered δ/n has no
incentive to reject.
I The continuation payoff if the offer δ/n is refused is
 
1 δ(n − 1) 1 1δ
1− + (1 − )
n 2n n 2n
I That is, with probability 1/n he will be the agenda setter and
propose what is expected to propose along the equilibrium.
I With complementary probability, he is not the agenda setter.
In this case, with probability 1/2 he will be in the winning
coalition and get δ/n.

20 / 33
Legislative Bargaining under Closed Rule

I Deviating involves a trade-off.

I The individual may reject in the hope to become agenda
setter in the future and obtain more. But on the other hand,
he is afraid of being offered zero in the future.
I The previous expression is equal to 1/n, which from the
perspective of today is worth δ/n.
I Therefore, if a legislator is offered δ/n, he has no incentive to
refuse (he is in fact indifferent). If he is offered less, he rejects.
I Given the above, it is easy to show that the agenda setter has
also no incentive to propose something else (exercise 1).

21 / 33
Closed Rule: Main Predictions

I Minimum winning coalitions will be formed.

I This is the so called Riker‘s “size principle”.
I If legislator are really impatient (δ ' 0) the agenda setter gets
all the pie.
I We still have unequal shares when δ ' 1
I When n is large, more inequality since it is quite unlikely that
an individual will be selected as agenda setter in the future.
I If super majority is needed, being agenda setter is less
valuable.
I Find the stationary equilibrium under unanimity rule (exercise
2)

22 / 33
Legislative Bargaining under Open Rule

I Under an OPEN RULE, amendments can be offered to the

proposal that was made by the initial agenda setter.
I That is, in the same session another member j 6= i is selected
with some probability. j can either offer an amendment or
conclude the amendment process.
I In the latter case there is a vote on the proposed distribution.
I If instead an amendment (that is, a new distribution) is
offered, it is voted against the proposal on the floor.
I Discounting occurs when a new amendment is offered and
voted.
I Under open rule, it is risky to give zero to a legislator (this
induces him to propose an amendment and delay approval) ⇒
More egalitarian distribution under open rule.

23 / 33
Legislative Bargaining

I Experimental evidence by McKelvey (1991), Frechette, Kagel,

Lehrer (2003)
I As the BF model predicts, the vast majority of proposals are
immediately accepted
I More delays under the open than under the closed rule.
I The majority of proposals involve a minimal winning coalition
(MWC)
I Proposer power is valuable but proposers end up receiving a
share substantially below equilibrium
I In later rounds of the experiment, proposer allocates more to
himself under closed rule

24 / 33
Voting over Public Policies

I Voting on a public policy is a considerably different problem

I When changing a policy, all individuals’ payoffs are affected
I We start by looking at a simple static model: Romer and
Rosenthal (1978)
I Suppose a committee with n members with quadratic utilities.
I Uni-dimensional policy and majority rule.
I Fixed agenda setter who has the monopoly over the agenda
(no counter proposal)

25 / 33
Agenda Setting Model (Romer and Rosenthal, 1978)

Median Agenda Setter

a b c

26 / 33
Agenda Setting Model

Median Agenda Setter

initial status quo

27 / 33
Agenda Setting Model

Median Agenda Setter

28 / 33
Agenda Setting Model

Median Agenda Setter

q is below the median

29 / 33
Agenda Setting Model

Median Agenda Setter

q is below the median

30 / 33
Agenda Setting Model

Median Agenda Setter

No change if q is in this interval

31 / 33
Agenda Setting Model

Proposal

45
b c q

32 / 33
Implications

I Setter’s model predicts inertia: there is a range of policy

where the status quo is not changed (i.e., proposal is on the
45% degree line).
I Agenda setter is powerful, but not a dictator
I Asymmetric policy changes: if agenda setter is to the right
(left) of the median, we expect policy increases wrt status quo
to be larger (smaller) than policy decreases.
I Not much evidence of asymmetric policy changes in monetary
policy committees (Riboni and Ruge-Murcia, 2000).

33 / 33