Peter Buisseret and Dan Bernhardt affect the total surplus through other channels.For ex- in exchange for implementing the project.The first as- ample,the possibility of participating in the project at piration depends on the voter's valuation,but the sec- date two might depend on whether an agreement was ond applies to all voters regardless of ideology,since formed at date one.In the Supplemental Appendix, all voters share a common value in extracting greater we consider this and related contexts,showing that surplus from the FG. while the conditions for an agreement to be signed may A domestic voter is more intrinsically aligned with depart from our benchmark condition,all surplus is the friendly party wheneverv:the friendly party nonetheless extracted by the FG whenever an agree- is relatively more likely to reach agreements with the ment is reached.15 FG in circumstances where the voter would prefer an op//s Endogenous Power Transitions.We now consider an agreement to no agreement.Yet,Lemma 1 reveals that electoral contest between dates one and two in which this domestic voter may nonetheless strictly prefer to domestic voters,who differ in their project valuations vote for the hostile party! vER,observe the date-one negotiation outcome and To understand why,suppose that e 1,so that then cast ballots in favor of their most-preferred date- DG2 always has proposal power in any renegotiation.16 two government A voter anticipates a positive prospect that either a Imminent elections have a polarizing effect on friendly or a hostile DG2 will renegotiate the standing date-one negotiations between FG and DG1.In the offer s2-indeed,with uniform preference shocks,each benchmark setting,initial negotiations are driven by party is equally likely to renegotiate the standing of- the conflict of interest between the date-one negotiat- fer in equilibrium.However,voters also anticipate that ing partners over the surplus division.When elections each party renegotiates with FG in different circum- respond to initial agreements,two other conflicts are stances,with the hostile party renegotiating when vot- critical:the policy and rent-seeking conflict between ers attach a higher valuation to the project than when the domestic incumbent and its possible successors,and the friendly party is renegotiating. First,ifλ∈[-（⑦+s2),-(u+s2)l,a friendly DG2 4 both domestic and foreign governments'conflict with the domestic electorate.As a result,initial agreements maintains the standing offer s2,but a hostile DG2 rene- no longer solely serve to divide the surplus:depending gotiates the offer from s2 to vr.Nonetheless,both do- on whether DG]is relatively friendly or hostile,initial mestic governments ultimately pursue the project.In agreements may themselves change both the division this context,a voter with valuation v +A derives a pos- and the size of the surplus from agreement. itive payoff difference from the hostile DG2 versus the Given status quo agreement s2,a voter with valua- friendly DG,of tion v prefers a date-two domestic government that, from her perspective,induces the best date-two nego- v+vF+入-(v+s2+入)=vF-S2>0. (9) tiation outcome.that is.that solves The voter's date-two project valuation (v +)does max VD(v,vD.S2). not affect her relative value because both governments would pursue the project:regardless of her valuation. she perceives that the hostile party is superior.because where s2=b if the project was implemented at date 1.501 it pursues the project and extracts a higher surplus in one with transfer b1,and s2=s if it was not imple- the same context that the friendly party would pursue mented at date one.The uniform distribution over the the project at the standing offer. preference shock yields Second,.ifλe[-(⑦+vr),-(u+vr)l,a friendly DG2 renegotiates the offer from s2 to vF,but a hostile Lemma 1.Given an inherited status quo agreement s2, DG2 instead walks away from the project.A voter with a domestic voter with project valuation v prefers to elect the hostile government if and only if project valuation v+A derives a payoff difference from the friendly DG2 versus the hostile DG2 of 卫+ 2 -+(UF-S2)=(S2) (8) UF+(v+入)-0. (10) A domestic voter's induced preference for the friendly Like the hostile DG2 in the first case,a friendly DG2 or hostile party depends on (1)her desire that a party in the second case appropriates FG's value from the reach an agreement with the FG in the same circum- project,vr.However,unlike the first case,this transfer stances where she would value the project and (2)her is partially offset by the fact that a friendly government desire to extract more generous transfers from the FG pursues the project in circumstances where a hostile government-and,possibly,the voter-wants to abandon it.When v+<0,the friendly government's 15 We consider variations on our benchmark setting in which(a)each continuation of the project generates a loss that is only L country faces start-up costs from pursuing the project in the first pe- partially offset by the transfer,vr.So,for example, riod an agreement is signed and (b)the distribution of the date-two preference shock in the domestic country depends on whether an voter's expectation of the payoff difference agreement is signed at date one.We thank an anonymous referee, who encouraged us to explore the robustness of our benchmark re- 16 We thank Mark Fey for conveying this intuition for our result in sult. an extremely insightful discussion. 1024Peter Buisseret and Dan Bernhardt affect the total surplus through other channels. For ex￾ample, the possibility of participating in the project at date two might depend on whether an agreement was formed at date one. In the Supplemental Appendix, we consider this and related contexts, showing that while the conditions for an agreement to be signed may depart from our benchmark condition, all surplus is nonetheless extracted by the FG whenever an agree￾ment is reached.15 Endogenous Power Transitions. We now consider an electoral contest between dates one and two in which domestic voters, who differ in their project valuations v ∈ R, observe the date-one negotiation outcome and then cast ballots in favor of their most-preferred date￾two government. Imminent elections have a polarizing effect on date-one negotiations between FG and DG1. In the benchmark setting, initial negotiations are driven by the conflict of interest between the date-one negotiat￾ing partners over the surplus division. When elections respond to initial agreements, two other conflicts are critical: the policy and rent-seeking conflict between the domestic incumbent and its possible successors, and both domestic and foreign governments’ conflict with the domestic electorate. As a result, initial agreements no longer solely serve to divide the surplus: depending on whether DG1 is relatively friendly or hostile, initial agreements may themselves change both the division and the size of the surplus from agreement. Given status quo agreement s2, a voter with valua￾tion v prefers a date-two domestic government that, from her perspective, induces the best date-two nego￾tiation outcome, that is, that solves max v2 D VD(v, v2 D,s2 ), where s2 = b1 if the project was implemented at date one with transfer b1, and s2 = s1 if it was not imple￾mented at date one. The uniform distribution over the preference shock λ yields Lemma 1. Given an inherited status quo agreement s2, a domestic voter with project valuation v prefers to elect the hostile government if and only if v ≤ v + v 2 + (vF − s2 ) ≡ vˆ(s2 ). (8) A domestic voter’s induced preference for the friendly or hostile party depends on (1) her desire that a party reach an agreement with the FG in the same circum￾stances where she would value the project and (2) her desire to extract more generous transfers from the FG 15 We consider variations on our benchmark setting in which (a) each country faces start-up costs from pursuing the project in the first pe￾riod an agreement is signed and (b) the distribution of the date-two preference shock in the domestic country depends on whether an agreement is signed at date one. We thank an anonymous referee, who encouraged us to explore the robustness of our benchmark re￾sult. in exchange for implementing the project. The first as￾piration depends on the voter’s valuation, but the sec￾ond applies to all voters regardless of ideology, since all voters share a common value in extracting greater surplus from the FG. A domestic voter is more intrinsically aligned with the friendly party whenever v > v+v 2 : the friendly party is relatively more likely to reach agreements with the FG in circumstances where the voter would prefer an agreement to no agreement. Yet, Lemma 1 reveals that this domestic voter may nonetheless strictly prefer to vote for the hostile party! To understand why, suppose that θ = 1, so that DG2 always has proposal power in any renegotiation.16 A voter anticipates a positive prospect that either a friendly or a hostile DG2 will renegotiate the standing offer s2—indeed, with uniform preference shocks, each party is equally likely to renegotiate the standing of￾fer in equilibrium. However, voters also anticipate that each party renegotiates with FG in different circum￾stances, with the hostile party renegotiating when vot￾ers attach a higher valuation to the project than when the friendly party is renegotiating. First, if λ ∈ [−(v + s2 ), −(v + s2 )], a friendly DG2 maintains the standing offer s2, but a hostile DG2 rene￾gotiates the offer from s2 to vF. Nonetheless, both do￾mestic governments ultimately pursue the project. In this context, a voter with valuation v + λ derives a pos￾itive payoff difference from the hostile DG2 versus the friendly DG2 of v + vF + λ − (v + s2 + λ) = vF − s2 > 0. (9) The voter’s date-two project valuation (v + λ) does not affect her relative value because both governments would pursue the project; regardless of her valuation, she perceives that the hostile party is superior, because it pursues the project and extracts a higher surplus in the same context that the friendly party would pursue the project at the standing offer. Second, if λ ∈ [−(v + vF ), −(v + vF )], a friendly DG2 renegotiates the offer from s2 to vF , but a hostile DG2 instead walks away from the project. A voter with project valuation v + λ derives a payoff difference from the friendly DG2 versus the hostile DG2 of vF + (v + λ) − 0. (10) Like the hostile DG2 in the first case, a friendly DG2 in the second case appropriates FG’s value from the project, vF . However, unlike the first case, this transfer is partially offset by the fact that a friendly government pursues the project in circumstances where a hostile government—and, possibly, the voter—wants to abandon it. When v + λ < 0, the friendly government’s continuation of the project generates a loss that is only partially offset by the transfer, vF . So, for example, voter v = v+v 2 ’s expectation of the payoff difference 16 We thank Mark Fey for conveying this intuition for our result in an extremely insightful discussion. 1024 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