DP1935 A Theory of Political Compromise

Author(s): Avinash K Dixit , Gene Grossman , Faruk Gul

Publication Date: July 1998

Keyword(s): compromise , Dynamic Games , policy-making , Political Parties , Risk Sharing

JEL(s): C73 , D78

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP1935.asp

We study political compromise founded on tacit cooperation. Two political parties must share a fixed pie in each of an infinite sequence of periods. In each period, the party in power has ultimate authority to divide the pie. Power evolves according to a Markov process among a set of political states corresponding to different degrees of political ‘strength’ for the two. The political strength of each party is a state variable, and the game is dynamic, rather than repeated. Allocations in an efficient, sub-game perfect equilibrium do not follow a Markov process. Rather, a party’s share reflects not only its current strength, but also how it got there in the recent history. We characterize the efficient division processes for majority rule and supermajority rule, and ask whether one regime allows greater compromise than the other.