Reelection and Renegotiation r(b)=1 indicates that the project is implemented at ing power or institutional features of the agreement date one and r(b)=0 indicates that it is not. that determine who can initiate renegotiations.We al- Between dates one and two,the date-one domes- low for arbitrary [0,1]to emphasize that results do tic government DG may be replaced by a new do- not depend sensitively on the distribution of future bar- mestic government DG2,according to a process that gaining power.3 The agent realized as proposer at date we describe below.After DG2 is realized.all domestic two can propose a new transfer,b2ER.If the date-two agents are hit by a common additive preference shock receiver accepts,this becomes the new date-two trans- A to the payoffs they derive from the project.We as- fer.Otherwise,the inherited terms from past negotia- sume that this publicly observed preference shock is tions remain in force,so that b2=s2.Next,DG2 decides drawn from a uniform distribution with support [ whether to quit the agreement and receive its outside o,o].This shock can capture an unanticipated wors- option of zero or to execute the agreement given the ening of the economy-unemployment may increase, date-two terms.FG then makes the agreed-upon trans- labor unions may organize industrial unrest,or there fer if and only if DG2 executes the agreement by im- may be civil unrest.Alternatively,new information may plementing the project come to light.For example,in 2004,an audit by the in- The expected lifetime payoff of a domestic agent coming Greek government found that,under a previ- with date-one project valuation v is ous PASOK administration,the government's statistics agency had misreported the country's debt and deficit (1-8)rn1(v+b1) figures to qualify for entry into the European single currency. Pr(v 2(v+b2+)f()d We first assume that date-one negotiations do not ∈{里， affect domestic election outcomes.Thus.DG2 is rela- tively hostile with exogenous probability Pr(v)E[0,1], and relatively friendly with probability Pr()=1- where f(A)is the density of the domestic preference 4号 Pr(v).This captures a benchmark in which the elec- shock,A.Here r(0,1]is the date-one domestic tion outcome is insensitive to the negotiation outcome government's initial decision to implement the project 'asn We later endogenize DG2's project valuation via an (r1=1)or not (r1 =0),r2 (0,1]denotes the project election.where electoral outcomes may depend on(1) outcome at date two,and b2 denotes the date-two whether the project was implemented at date one,and transfer from FG when the project is implemented the terms of the initial bargain;(2)how voters make at date two;that is,when r2=1.Note that domestic voting decisions (prospectively or retrospectively):and agents care about date-two policy outcomes regardless (3)the set of feasible replacements.We assume that of who holds office at that date.In addition to deriving there is sufficient variation in the domestic preference project-related payoffs like any other domestic agent, shockλ： we assume that each domestic political party derives an office-holding benefit of w>0 at any date that it holds office Assumption 3:UF+v<o,v+s>-0 The analogous expected payoff of FG with project Assumption 3 says that there is enough uncertainty valuation vF is about the common domestic preference shock A that (a)it could exceed the expected surplus from the (1-8)rn(vF-b1) project between FG and the relatively project-friendly DG2 with valuation and (b)it could be even lower Pr(v r2(uF-b2)f(入)dλ than the expected value for the relatively hostile DG2 with valuation v from participating in the project at the initial standing offer,s1. One may observe that FG's project valuation does not After A is realized,the initial terms for the project evolve over time.This assumption eases presentation can be renegotiated,or if agreement was not reached at and analysis,allowing us to focus on the effects of un- date one,the governments can try again.The inherited certainty about DG2's valuation v.One can also in- date-one terms serve as the reversion point s2 for date- terpret the FG as the IMF or the World Bank,whose two bargaining.Thus,if the project was implemented at leadership is not expected to change over the course of date one with transfer b,the status-quo transfer is s2 negotiations. b;this transfer will be made at date two if the project is again implemented and new terms are not agreed upon For example,Thatcher's renegotiation of Britain's EU POLICY OUTCOMES AT DATE TWO budget rebate persisted from 1984 until 2005.If,in- We start by analyzing the long-term consequences of stead,the project was not implemented at date one, date-one outcomes.If the project was implemented at then the status quo transfer(i.e.,starting point for date- two negotiations in which the governments try again) iS S2=S1. 13 While does not play a key role,scholars have still considered With probability 0 [0,1],DG2 proposes the new how features of international institutions-for example,renegotia- tion protocols-might be chosen to maximize the prospect that an terms,and with probability 1-6 the FG makes the pro- agreement survives.See Koremenos,Lipson,and Snidal (2001).or posal.The parameter 6 could reflect intrinsic bargain- Koremenos (2001). 1021Reelection and Renegotiation r1(b1) = 1 indicates that the project is implemented at date one and r1(b1) = 0 indicates that it is not. Between dates one and two, the date-one domes￾tic government DG1 may be replaced by a new do￾mestic government DG2, according to a process that we describe below. After DG2 is realized, all domestic agents are hit by a common additive preference shock λ to the payoffs they derive from the project. We as￾sume that this publicly observed preference shock is drawn from a uniform distribution with support [ − σ, σ]. This shock can capture an unanticipated wors￾ening of the economy—unemployment may increase, labor unions may organize industrial unrest, or there may be civil unrest.Alternatively, new information may come to light. For example, in 2004, an audit by the in￾coming Greek government found that, under a previ￾ous PASOK administration, the government’s statistics agency had misreported the country’s debt and deficit figures to qualify for entry into the European single currency. We first assume that date-one negotiations do not affect domestic election outcomes. Thus, DG2 is rela￾tively hostile with exogenous probability Pr(v) ∈ [0, 1], and relatively friendly with probability Pr(v) = 1 − Pr(v). This captures a benchmark in which the elec￾tion outcome is insensitive to the negotiation outcome. We later endogenize DG2’s project valuation via an election, where electoral outcomes may depend on (1) whether the project was implemented at date one, and the terms of the initial bargain; (2) how voters make voting decisions (prospectively or retrospectively); and (3) the set of feasible replacements. We assume that there is sufficient variation in the domestic preference shock λ: Assumption 3: vF + v < σ, v + s1 > −σ. Assumption 3 says that there is enough uncertainty about the common domestic preference shock λ that (a) it could exceed the expected surplus from the project between FG and the relatively project-friendly DG2 with valuation v; and (b) it could be even lower than the expected value for the relatively hostile DG2 with valuation v from participating in the project at the initial standing offer, s1. After λ is realized, the initial terms for the project can be renegotiated, or if agreement was not reached at date one, the governments can try again. The inherited date-one terms serve as the reversion point s2 for date￾two bargaining. Thus,if the project was implemented at date one with transfer b1, the status-quo transfer is s2 = b1; this transfer will be made at date two if the project is again implemented and new terms are not agreed upon. For example, Thatcher’s renegotiation of Britain’s EU budget rebate persisted from 1984 until 2005. If, in￾stead, the project was not implemented at date one, then the status quo transfer (i.e., starting point for date￾two negotiations in which the governments try again) is s2 = s1. With probability θ ∈ [0, 1], DG2 proposes the new terms, and with probability 1 − θ the FG makes the pro￾posal. The parameter θ could reflect intrinsic bargain￾ing power or institutional features of the agreement that determine who can initiate renegotiations. We al￾low for arbitrary θ ∈ [0, 1] to emphasize that results do not depend sensitively on the distribution of future bar￾gaining power.13 The agent realized as proposer at date two can propose a new transfer, b2 ∈ R. If the date-two receiver accepts, this becomes the new date-two trans￾fer. Otherwise, the inherited terms from past negotia￾tions remain in force, so that b2 = s2. Next,DG2 decides whether to quit the agreement and receive its outside option of zero or to execute the agreement given the date-two terms. FG then makes the agreed-upon trans￾fer if and only if DG2 executes the agreement by im￾plementing the project. The expected lifetime payoff of a domestic agent with date-one project valuation v is (1 − δ)r1(v + b1 ) + δ v ∈{v,v} Pr(v ) σ −σ r2(v + b2 + λ)f(λ) dλ, where f(λ) is the density of the domestic preference shock, λ. Here r1 ∈ {0, 1} is the date-one domestic government’s initial decision to implement the project (r1 = 1) or not (r1 = 0), r2 ∈ {0, 1} denotes the project outcome at date two, and b2 denotes the date-two transfer from FG when the project is implemented at date two; that is, when r2 = 1. Note that domestic agents care about date-two policy outcomes regardless of who holds office at that date. In addition to deriving project-related payoffs like any other domestic agent, we assume that each domestic political party derives an office-holding benefit of w > 0 at any date that it holds office. The analogous expected payoff of FG with project valuation vF is (1 − δ)r1(vF − b1 ) + δ v ∈{v,v} Pr(v ) σ −σ r2(vF − b2 )f(λ) dλ. One may observe that FG’s project valuation does not evolve over time. This assumption eases presentation and analysis, allowing us to focus on the effects of un￾certainty about DG2’s valuation v2 D. One can also in￾terpret the FG as the IMF or the World Bank, whose leadership is not expected to change over the course of negotiations. POLICY OUTCOMES AT DATE TWO We start by analyzing the long-term consequences of date-one outcomes. If the project was implemented at 13 While θ does not play a key role, scholars have still considered how features of international institutions—for example, renegotia￾tion protocols—might be chosen to maximize the prospect that an agreement survives. See Koremenos, Lipson, and Snidal (2001), or Koremenos (2001). 1021 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