Peter Buisseret and Dan Bernhardt To understand why,notice that the change in relative subject to the participation constraint that ri(b1)=1 surplus between the date-one negotiators from increas- if Equation (14)holds,and r(b1)=0,otherwise,and ing the transfer from bi to a higher offer b is the date-two status quo offer is s2(r(b1),b1)=r(b1)b +(1 -r1(b1))s1.We first characterize date-one ne- 6(Pr(umed≤i(b)-Pr(umed≤i(b1)) gotiation outcomes between the FG and the hostile party. ×(△(vb,)-△(vb,) Proposition 2.(Hostile Party Initially Holds Power.) If DGI is friendly,that is,if vp =then the second bracketed term is strictly negative:if instead DG,is (1)If v+vF 0,that is,the static surplus be- hostile,that is,if vb =v,then the second term is strictly tween hostile DG and FG is negative,a positive.However,higher transfers also encourage do- date-one agreement is never signed. mestic voters to support the friendly party in the polls, (2)If v+vg >0,there exists 8*(v,w)>0 such so that that if and only if an election is not too close,,that is,8≤8*，a date-one agree- b1>b1→(b)<i(b1) ment is signed.Threshold 8*(v,w)satisfies →Pr(umed≤t(b)<Pr(umed≤(b1). limw→o8*(u,D)=0 for any2∈(-vp,T) (3)If there is a date-one agreement,the FG re- tains all of the surplus. The relatively hostile party values retaining office- both for office rents and because of policy differences with the relatively friendly party-so more generous With a responsive electorate,more than a positive transfers indirectly reduce its value from a date-one static surplus is necessary for the governments to reach 4号 agreement,while the opposite holds for the friendly an initial agreement.With a hostile domestic govern- party.The change in surplus reflects both office rents ment,more generous offers reduce the governments' and policy differences,as each party values its role in anticipated future surplus.The reason is that more gen- negotiating agreements.As office rents w rise,the con- erous offers lower the prospect that the hostile party & sequences for increasing or decreasing the surplus are retains power,denying it both the chance to capture of- compounded,but they do not vanish as w becomes very fice rents w and the ability to steer future negotiations. small.since policy conflicts remain. In a dynamic setting where elections do not respond to Lemma 2 highlights the polarizing effect of domestic negotiations,an agreement would be signed whenever elections on conflicts and confluences of interest be- date-one surplus is positive.Now,however,sufficiently tween the date-one negotiating parties.In the bench- imminent elections preclude a date-one agreement,for mark setting with exogenous elections,different offers any positive date-one surplus,if office-holding motives change the division of the surplus,but not its size.In are strong.Finally.because one government's gain must contrast,when elections are sensitive to negotiation constitute a loss to the other,the FG appropriates all outcomes,offers affect both the surplus size and its surplus whenever an agreement is reached,as in the division. benchmark setting.Proposition 2 highlights that more We now characterize date-one negotiation out- proximate elections can make impossible an agree- comes.DG accepts an offer;that is,r(b1)=1,if and ment between FG and the hostile DG that otherwise only if could have been secured;that is,even when the static surplus from agreement is positive. (1-8)(b+b1) Matters are very different when DG is the friendly party with project valuation +8 Pr(vmed <i(b1))(1[vp=v]w+VD(vD,v,bI)) Proposition 3.(Friendly Party Initially Holds Power.) +8Pr(umed>(b1)(1[v2=w+Vb(b,元，b1) ≥8Pr(umed≤t(s1)(1[b=uw+VD(vb,u,s) (l)Ifi+vp≥0，so the static surplus between +8Pr(umed>(s1)(1[b=可w+VD(b,元，s1) friendly DG and FG is positive,a date-one agreement is always signed. (14) (2)If元+vp<O,there exists8*(⑦，w)>0such that if and only if an election is sufficiently Thus,FG's date-one proposal solves close;that is,8≥8*，a date-one agree-. nent is signed..Threshold8*(⑦，D)satisfies max(1-8)n(b1)(vp-b1) limw→o8*(⑦，D)=0 for any∈(y,-vr) D1>51 (3)If FG's valuation ve is not too small,there exists 8z8**such that if the election is suffi- +8Pr(umed<i(s2(r(b1),b1)))VF(v,s2(r1(b1),b1)) ciently close,that is,if8>δ，and office rents +8 Pr(umed >i(s2(r1(b1),b1)))Vr(,s2(r1(b1),b1)). are sufficiently large,then FG offers DGI a strictly positive share of the surplus from the (15) agreement. 1026Peter Buisseret and Dan Bernhardt To understand why, notice that the change in relative surplus between the date-one negotiators from increas￾ing the transfer from b1 to a higher offer b 1 is δ(Pr(vmed ≤ vˆ(b 1 )) − Pr(vmed ≤ vˆ(b1 ))) × ((v1 D, v) − (v1 D, v)). If DG1 is friendly, that is, if v1 D = v, then the second bracketed term is strictly negative; if instead DG2 is hostile, that is, if v1 D = v, then the second term is strictly positive. However, higher transfers also encourage do￾mestic voters to support the friendly party in the polls, so that b 1 > b1 ⇒ vˆ(b 1 ) < vˆ(b1 ) ⇒ Pr(vmed ≤ vˆ(b 1 )) < Pr(vmed ≤ vˆ(b1 )). The relatively hostile party values retaining office— both for office rents and because of policy differences with the relatively friendly party—so more generous transfers indirectly reduce its value from a date-one agreement, while the opposite holds for the friendly party. The change in surplus reflects both office rents and policy differences, as each party values its role in negotiating agreements. As office rents w rise, the con￾sequences for increasing or decreasing the surplus are compounded, but they do not vanish as w becomes very small, since policy conflicts remain. Lemma 2 highlights the polarizing effect of domestic elections on conflicts and confluences of interest be￾tween the date-one negotiating parties. In the bench￾mark setting with exogenous elections, different offers change the division of the surplus, but not its size. In contrast, when elections are sensitive to negotiation outcomes, offers affect both the surplus size and its division. We now characterize date-one negotiation out￾comes. DG1 accepts an offer; that is, r1(b1) = 1, if and only if (1 − δ)(v1 D + b1 ) + δ Pr(vmed ≤ vˆ(b1 ))(1[v1 D = v]w + VD(v1 D, v, b1 )) + δ Pr(vmed > vˆ(b1 ))(1[v1 D = v]w + VD(v1 D, v, b1 )) ≥ δ Pr(vmed ≤ vˆ(s1 ))(1[v1 D = v]w + VD(v1 D, v,s1 )) + δ Pr(vmed > vˆ(s1 ))(1[v1 D = v]w + VD(v1 D, v,s1 )). (14) Thus, FG’s date-one proposal solves max b1≥s1 (1 − δ)r1(b1 )(vF − b1 ) +δ Pr(vmed ≤ vˆ(s2(r1(b1 ), b1 )))VF (v,s2(r1(b1 ), b1 )) +δ Pr(vmed > vˆ(s2(r1(b1 ), b1 )))VF (v,s2(r1(b1 ), b1 )), (15) subject to the participation constraint that r1(b1) = 1 if Equation (14) holds, and r1(b1) = 0, otherwise, and the date-two status quo offer iss2(r1(b1), b1) = r1(b1)b1 + (1 − r1(b1))s1. We first characterize date-one ne￾gotiation outcomes between the FG and the hostile party. Proposition 2. (Hostile Party Initially Holds Power.) (1) If v + vF ≤ 0, that is, the static surplus be￾tween hostile DG1 and FG is negative, a date-one agreement is never signed. (2) If v + vF > 0, there exists δ∗(v, w) > 0 such that if and only if an election is not too close, that is, δ ≤ δ*, a date-one agree￾ment is signed. Threshold δ∗(v, w) satisfies limw→∞ δ∗(v, w) = 0 for any v ∈ (−vF , v). (3) If there is a date-one agreement, the FG re￾tains all of the surplus. With a responsive electorate, more than a positive static surplus is necessary for the governments to reach an initial agreement. With a hostile domestic govern￾ment, more generous offers reduce the governments’ anticipated future surplus. The reason is that more gen￾erous offers lower the prospect that the hostile party retains power, denying it both the chance to capture of￾fice rents w and the ability to steer future negotiations. In a dynamic setting where elections do not respond to negotiations, an agreement would be signed whenever date-one surplus is positive. Now, however, sufficiently imminent elections preclude a date-one agreement, for any positive date-one surplus, if office-holding motives are strong.Finally, because one government’s gain must constitute a loss to the other, the FG appropriates all surplus whenever an agreement is reached, as in the benchmark setting. Proposition 2 highlights that more proximate elections can make impossible an agree￾ment between FG and the hostile DG1 that otherwise could have been secured; that is, even when the static surplus from agreement is positive. Matters are very different when DG1 is the friendly party with project valuation v: Proposition 3. (Friendly Party Initially Holds Power.) (1) If v + vF ≥ 0, so the static surplus between friendly DG1 and FG is positive, a date-one agreement is always signed. (2) If v + vF < 0, there exists δ∗∗(v, w) > 0 such that if and only if an election is sufficiently close; that is, δ ≥ δ**, a date-one agree￾ment is signed. Threshold δ∗∗(v, w) satisfies limw→∞ δ∗∗(v, w) = 0 for any v ∈ (v, −vF ). (3) If FG’s valuation vF is not too small, there exists δ>δ ˆ ∗∗ such that if the election is suffi￾ciently close, that is, if δ > δˆ, and office rents are sufficiently large, then FG offers DG1 a strictly positive share of the surplus from the agreement. 1026 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