Reelection and Renegotiation In a dynamic setting where elections do not respond DGI's participation.Our next result provides an unam- to negotiations,a positive static surplus is necessary biguous resolution to this question: and sufficient for the governments reach an agreement But with endogenous turnover,a positive static surplus is no longer necessary:more generous offers bolster Corollary 1.A hostile domestic government is less likely the re-election prospects of the friendly DG1,raising to successfully negotiate a date-one agreement.Nonethe- its chances of gaining office rents w as well as the abil- less,whenever it implements the project,it negotiates a ity to steer subsequent negotiations in its favor.When higher transfer than what a friendly domestic govern- ment would obtain. elections respond to negotiating outcomes,the surplus from agreement itself changes with more generous of- fers:the date-one negotiating parties'joint desire to The result reflects that the friendly party derives a exclude the hostile party by shaping voters'induced higher surplus from agreements than the hostile party preferences creates a confluence of interest that may simply because its participation can be bought more facilitate agreement despite a negative static surplus. cheaply by the FG.The hostile DG]'s participation con- As elections draw nearer,the static conflict between straint is more stringent than the analogous constraint FG and friendly DGI pales in significance to the joint for a friendly DG1 so whenever FG derives no surplus interest of both governments in using date-one out- from an agreement,the result is immediate.Suppose, comes to steer voters'induced preferences in favor of instead,that the friendly DG's participation constraint re-electing the incumbent.If office-holding motives are is slack when FG advances its most preferred offer strong enough,imminent elections facilitate a date-one This offer,bi,solves the first-order condition associ- agreement for any date-one surplus-positive or nega- ated with Equation(15).Recall that FG and the hostile tive.Proposition 3 highlights that more proximate elec- DGI face a pure conflict of interest:any gain for one tions make possible an agreement between FG and must come at the expense of the other.If b is most the friendly DG that otherwise could not have been preferred by FG.its value is strictly increasing in an of 4r元 secured. fer biE[s1,bi]-and so,the hostile party's value rela- Proposition 1 establishes that in a setting with exoge. tive to rejection is strictly decreasing on this interval.It nous turnover,a date-one agreement is signed when follows that to induce the hostile DGT's participation, ever it is efficient to undertake the project,that is, FG must overextend itself relative to its most preferred when the (dynamic)surplus from an agreement is pos- offer;that is,its offer must exceed bi. itive,from the perspective of the date-one negotiat- Thus,even at date one,voters face a tradeoff with ing parties.In the Supplemental Appendix,we high- a more hostile domestic government.If DG]is too light that in a setting with endogenous turnover(that hostile,negotiations will break down.If,instead,it is is,Propositions 2 and 3).date-one negotiations may fail very friendly to the project,it may agree to relatively even when there exist transfers from FG to DG for ungenerous terms.In the event that the friendly DG which the joint surplus from an agreement is strictly reaches agreement with FG.its conflict with voters rises positive.19 with its value from holding office w.because it becomes With exogenous turnover,or when DG is relatively willing to accept ever-worse offers to improve its elec- hostile,FG appropriates all surplus from agreement. toral prospects relative to securing no transfers.With By contrast,Proposition 3 shows that when DG is rela- the hostile DG1,the consequences of a greater office tively friendly,an imminent election may induce FG to concerns are less clear-cut.On the one hand,condi- offer DGI strictly positive surplus.The reason is that tional on securing agreement,greater office motivation when negotiations are conducted close to the election, makes the hostile party demand more transfers to com- FG's interest in promoting the friendly DGI's reelec- pensate for its diminished electoral prospects resulting tion may lead it to make more generous offers that from an agreement.This gives the hostile party com- sway voters toward the incumbent. mitment power to reject offers that the friendly party This raises a basic question:Conditional on securing would accept.On the other hand,a near-exclusive con- a date-one agreement,which date-one party-the hos- cern for retaining office may preclude agreement be- tile party or the friendly one-extracts greater trans- tween a hostile DG and FG. fers from the FG?On the one hand,a friendly DG In the Supplemental Appendix,we compare equi- enjoys a strictly positive surplus from the agreement, librium transfers when an agreement is reached in our while a hostile DG is held to its participation con- benchmark setting of exogenous turnover(i.e.,Propo- straint.On the other hand,the friendly DGi's partic sition 1)with the corresponding transfers when an ipation can be more easily secured than the hostile agreement is reached in the context of endogenous turnover (i.e.,Propositions 2 and 3).We show that whenever FG's transfer to friendly DG is larger with 19 The normative consequences may be less clear-cut when evaluated endogenous turnover than in our benchmark setting. from the perspective of other domestic agents than the date-one do- FG's transfer to the hostile DG is also larger whenever mestic government,such as the median voter.Since we do not explain an agreement is reached.Moreover,if the relative value the initial appointment of the date-one domestic government,and of holding date-two domestic power (w)is sufficiently the circumstances under which it was majority-preferred,we refrain from pursuing welfare results along these lines.We thank an anony large,then-relative to the benchmark with exogenous mous referee,who encouraged us to highlight the potential ambiguity turnover-FG's date-one transfer that ensures DGI's in evaluating date-one policy outcomes. participation in the setting with endogenous turnover 1027Reelection and Renegotiation In a dynamic setting where elections do not respond to negotiations, a positive static surplus is necessary and sufficient for the governments reach an agreement. But with endogenous turnover, a positive static surplus is no longer necessary: more generous offers bolster the re-election prospects of the friendly DG1, raising its chances of gaining office rents w as well as the abil￾ity to steer subsequent negotiations in its favor. When elections respond to negotiating outcomes, the surplus from agreement itself changes with more generous of￾fers: the date-one negotiating parties’ joint desire to exclude the hostile party by shaping voters’ induced preferences creates a confluence of interest that may facilitate agreement despite a negative static surplus. As elections draw nearer, the static conflict between FG and friendly DG1 pales in significance to the joint interest of both governments in using date-one out￾comes to steer voters’ induced preferences in favor of re-electing the incumbent. If office-holding motives are strong enough,imminent elections facilitate a date-one agreement for any date-one surplus—positive or nega￾tive. Proposition 3 highlights that more proximate elec￾tions make possible an agreement between FG and the friendly DG1 that otherwise could not have been secured. Proposition 1 establishes that in a setting with exoge￾nous turnover, a date-one agreement is signed when￾ever it is efficient to undertake the project, that is, when the (dynamic) surplus from an agreement is pos￾itive, from the perspective of the date-one negotiat￾ing parties. In the Supplemental Appendix, we high￾light that in a setting with endogenous turnover (that is, Propositions 2 and 3), date-one negotiations may fail even when there exist transfers from FG to DG1 for which the joint surplus from an agreement is strictly positive.19 With exogenous turnover, or when DG1 is relatively hostile, FG appropriates all surplus from agreement. By contrast,Proposition 3 shows that when DG1 is rela￾tively friendly, an imminent election may induce FG to offer DG1 strictly positive surplus. The reason is that when negotiations are conducted close to the election, FG’s interest in promoting the friendly DG1’s reelec￾tion may lead it to make more generous offers that sway voters toward the incumbent. This raises a basic question: Conditional on securing a date-one agreement, which date-one party—the hos￾tile party or the friendly one—extracts greater trans￾fers from the FG? On the one hand, a friendly DG1 enjoys a strictly positive surplus from the agreement, while a hostile DG1 is held to its participation con￾straint. On the other hand, the friendly DG1’s partic￾ipation can be more easily secured than the hostile 19 The normative consequences may be less clear-cut when evaluated from the perspective of other domestic agents than the date-one do￾mestic government, such as the median voter. Since we do not explain the initial appointment of the date-one domestic government, and the circumstances under which it was majority-preferred, we refrain from pursuing welfare results along these lines. We thank an anony￾mous referee,who encouraged us to highlight the potential ambiguity in evaluating date-one policy outcomes. DG1’s participation.Our next result provides an unam￾biguous resolution to this question: Corollary 1. A hostile domestic government is less likely to successfully negotiate a date-one agreement.Nonethe￾less, whenever it implements the project, it negotiates a higher transfer than what a friendly domestic govern￾ment would obtain. The result reflects that the friendly party derives a higher surplus from agreements than the hostile party simply because its participation can be bought more cheaply by the FG.The hostile DG1’s participation con￾straint is more stringent than the analogous constraint for a friendly DG1, so whenever FG derives no surplus from an agreement, the result is immediate. Suppose, instead, that the friendly DG1’s participation constraint is slack when FG advances its most preferred offer. This offer, b∗ 1, solves the first-order condition associ￾ated with Equation (15). Recall that FG and the hostile DG1 face a pure conflict of interest: any gain for one must come at the expense of the other. If b∗ 1 is most preferred by FG, its value is strictly increasing in an of￾fer b1 ∈ [s1, b∗ 1]—and so, the hostile party’s value rela￾tive to rejection is strictly decreasing on this interval. It follows that to induce the hostile DG1’s participation, FG must overextend itself relative to its most preferred offer; that is, its offer must exceed b∗ 1. Thus, even at date one, voters face a tradeoff with a more hostile domestic government. If DG1 is too hostile, negotiations will break down. If, instead, it is very friendly to the project, it may agree to relatively ungenerous terms. In the event that the friendly DG1 reaches agreement with FG,its conflict with voters rises with its value from holding office w, because it becomes willing to accept ever-worse offers to improve its elec￾toral prospects relative to securing no transfers. With the hostile DG1, the consequences of a greater office concerns are less clear-cut. On the one hand, condi￾tional on securing agreement, greater office motivation makes the hostile party demand more transfers to com￾pensate for its diminished electoral prospects resulting from an agreement. This gives the hostile party com￾mitment power to reject offers that the friendly party would accept. On the other hand, a near-exclusive con￾cern for retaining office may preclude agreement be￾tween a hostile DG1 and FG. In the Supplemental Appendix, we compare equi￾librium transfers when an agreement is reached in our benchmark setting of exogenous turnover (i.e., Propo￾sition 1) with the corresponding transfers when an agreement is reached in the context of endogenous turnover (i.e., Propositions 2 and 3). We show that whenever FG’s transfer to friendly DG1 is larger with endogenous turnover than in our benchmark setting, FG’s transfer to the hostile DG1 is also larger whenever an agreement is reached.Moreover,if the relative value of holding date-two domestic power (w) is sufficiently large, then—relative to the benchmark with exogenous turnover—FG’s date-one transfer that ensures DG1’s participation in the setting with endogenous turnover 1027 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