Reelection and Renegotiation valuation does not hinge on the date-one policy out- surplus arising from an agreement is the same as the come.At date one,the FG makes a proposal to the surplus in the event of disagreement.Thus,the total sur- domestic government DG1,which is either relatively plus from a date-one agreement versus no agreement friendly (vp=)or relatively hostile(vp=v).DG ac- is unrelated to its terms: cepts the offer,that is,r(b)=1,if and only if (1-8)(b+vF)+8Pr(u)△(D,y) (1-8)(2+b1) +8Pr(⑦)△(b,)-(1-8)(0+0) +8∑Pr( =]w+Vo(b,哈，b1) -8Pr(u)△(b,)-8Pr()△(2，) 吃也，可 (1-8)(v2+vr) (7) ≥(1-8)0 Because there is a constant surplus at each date,the sur- +8∑Pr()[呢=w+Vn(,s) plus across dates is also constant,and its division rep- resents a pure conflict of interest between the date-one negotiating parties.Starting from an offer that gives (5) DG its reservation payoff,suppose that FG can benefit from making larger initial offers that buttress its future where we recall that w>0 is the office rent that is en- negotiating position vis-a-vis an anticipated date-two joyed if and only if the incumbent is reelected;that is. domestic government.This could arise if both date-one p=vp.Thus,the FG's date-one proposal solves governments expect a significantly more hostile DG2 and the election is sufficiently imminent that FG's im- max (1-8)r(b1)(vF -b1) mediate losses from a larger transfer today are out- 4号元 D12s1 weighed by its expected future gains.Whenever a more generous offer raises FG's total expected payoff,how- +6 ∑Pr(哈)r(哈，1(b1)b1+(1-r1(b)s）, ever,the constant total expected surplus implies that 吃∈{但，可 this gain must come at the expense of DG,which therefore prefers to reject the offer. subject to the participation constraint that r(b)=1 if Thus,when agreement is reached,FG extracts all sur- Equation(5)holds,and r(b1)=0,otherwise. plus from agreement.Equation(7)reveals that the to- tal surplus is positive if and only if the total static sur- Proposition 1.When the identity of the date-two domes- plus is positive:uncertainty about the future has no tic government does not depend on the date-one agree- effect on whether an agreement is signed.Note,how- 是 ment,the project is implemented at date one if and only ever,that the transfer from FG to DG does not solve if the date-one surplus is positive;that is,vp+v0. the static participation constraint that vp+b>0,but Further,if the project is implemented at date one,the rather the dynamic participation constraint given by FG extracts all surplus,offering the transfer that satisfies Equation(5).14 Equation (5). For simplicity,we assume that the FG makes the of- Strikingly,uncertainty about who will hold future fer at date one.If,instead,the domestic government, domestic power has no effect on both (1)whether an DG,makes the initial offer,the conditions for agree- agreement is signed and(2)how the surplus from an ment in Proposition 1 still apply,but now the domestic agreement is divided between the governments.In par- government extracts all surplus. ticular,the static and dynamic conditions for a date- Exogenous power transitions create a constant to- one agreement coincide.Thus,Proposition 1 states that tal surplus between the FG and the date-one domes- a date-one agreement is signed if and only if such an tic government.So long as the static surplus from an agreement is efficient from the perspective of the date- agreement is positive,the FG can and will wish to one negotiating parties. induce the domestic government's participation.But, To understand the result,let A(vp,vp)be the ex ante there is no scope for both governments to benefit from expected date-two surplus from the perspective of the more generous offers-so if and only if the date-one date-one bargaining parties,when the date-one domes- surplus is positive,(1)an agreement is signed and(2) the discounted total expected surplus is fully extracted eys tic government DGI has project valuation vp and they by the FG. anticipate that DG2 has valuation vp: To facilitate a clear and tractable benchmark.we assume that the sole dynamic linkage across periods △(b,v2)=1[v哈=]w is that date-one agreements determine the date-two standing offer,s2.In practice,date-one agreements (b+入+vF)f()d.(6) -(+F) 14 It is routine to show that whenever the static surplus between FG /:sonu and hostile DG is positive,the hostile DG1 extracts a larger transfer Crucially,this surplus does not depend on the date than would a friendly DG.We establish this in the Supplemental two standing offer,s2.In particular,the total date-two Appendix. 1023Reelection and Renegotiation valuation does not hinge on the date-one policy out￾come. At date one, the FG makes a proposal to the domestic government DG1, which is either relatively friendly (v1 D = v) or relatively hostile (v1 D = v).DG1 ac￾cepts the offer, that is, r1(b1) = 1, if and only if (1 − δ)(v1 D + b1 ) + δ v2 D∈{v,v} Pr(v2 D)  1[v2 D = v1 D]w + VD(v1 D, v2 D, b1 )  ≥ (1 − δ)0 + δ v2 D∈{v,v} Pr(v2 D)  1[v2 D = v1 D]w + VD(v1 D, v2 D,s1 )  , (5) where we recall that w > 0 is the office rent that is en￾joyed if and only if the incumbent is reelected; that is, v2 D = v1 D. Thus, the FG’s date-one proposal solves max b1≥s1 (1 − δ)r1(b1 )(vF − b1 ) + δ v2 D∈{v,v} Pr(v2 D)VF (v2 D,r1(b1 )b1 + (1 − r1(b1 ))s1 ), subject to the participation constraint that r1(b1) = 1 if Equation (5) holds, and r1(b1) = 0, otherwise. Proposition 1. When the identity of the date-two domes￾tic government does not depend on the date-one agree￾ment, the project is implemented at date one if and only if the date-one surplus is positive; that is, v1 D + vF ≥ 0. Further, if the project is implemented at date one, the FG extracts all surplus, offering the transfer that satisfies Equation (5). Strikingly, uncertainty about who will hold future domestic power has no effect on both (1) whether an agreement is signed and (2) how the surplus from an agreement is divided between the governments. In par￾ticular, the static and dynamic conditions for a date￾one agreement coincide. Thus, Proposition 1 states that a date-one agreement is signed if and only if such an agreement is efficient from the perspective of the date￾one negotiating parties. To understand the result,let (v1 D, v2 D) be the ex ante expected date-two surplus from the perspective of the date-one bargaining parties, when the date-one domes￾tic government DG1 has project valuation v1 D and they anticipate that DG2 has valuation v2 D: (v1 D, v2 D) = 1[v2 D = v1 D]w + σ −(v2 D+vF ) (v1 D + λ + vF )f(λ)dλ. (6) Crucially, this surplus does not depend on the date￾two standing offer, s2. In particular, the total date-two surplus arising from an agreement is the same as the surplus in the event of disagreement.Thus, the total sur￾plus from a date-one agreement versus no agreement is unrelated to its terms: (1 − δ)(v1 D + vF ) + δ Pr(v)(v1 D, v) + δ Pr(v)(v1 D, v) − (1 − δ)(0 + 0) − δ Pr(v)(v1 D, v) − δ Pr(v)(v1 D, v) = (1 − δ)(v1 D + vF ). (7) Because there is a constant surplus at each date, the sur￾plus across dates is also constant, and its division rep￾resents a pure conflict of interest between the date-one negotiating parties. Starting from an offer that gives DG1 its reservation payoff, suppose that FG can benefit from making larger initial offers that buttress its future negotiating position vis-à-vis an anticipated date-two domestic government. This could arise if both date-one governments expect a significantly more hostile DG2 and the election is sufficiently imminent that FG’s im￾mediate losses from a larger transfer today are out￾weighed by its expected future gains.Whenever a more generous offer raises FG’s total expected payoff, how￾ever, the constant total expected surplus implies that this gain must come at the expense of DG1, which therefore prefers to reject the offer. Thus, when agreement is reached, FG extracts all sur￾plus from agreement. Equation (7) reveals that the to￾tal surplus is positive if and only if the total static sur￾plus is positive: uncertainty about the future has no effect on whether an agreement is signed. Note, how￾ever, that the transfer from FG to DG1 does not solve the static participation constraint that v1 D + b1 ≥ 0, but rather the dynamic participation constraint given by Equation (5). 14 For simplicity, we assume that the FG makes the of￾fer at date one. If, instead, the domestic government, DG1, makes the initial offer, the conditions for agree￾ment in Proposition 1 still apply, but now the domestic government extracts all surplus. Exogenous power transitions create a constant to￾tal surplus between the FG and the date-one domes￾tic government. So long as the static surplus from an agreement is positive, the FG can and will wish to induce the domestic government’s participation. But, there is no scope for both governments to benefit from more generous offers—so if and only if the date-one surplus is positive, (1) an agreement is signed and (2) the discounted total expected surplus is fully extracted by the FG. To facilitate a clear and tractable benchmark, we assume that the sole dynamic linkage across periods is that date-one agreements determine the date-two standing offer, s2. In practice, date-one agreements 14 It is routine to show that whenever the static surplus between FG and hostile DG1 is positive, the hostile DG1 extracts a larger transfer than would a friendly DG1. We establish this in the Supplemental Appendix. 1023 Downloaded from https://www.cambridge.org/core. Shanghai JiaoTong University, on 26 Oct 2018 at 03:53:04, subject to the Cambridge Core terms of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/S0003055418000400