Bargaining Under Institutional Challenges
Abstract: Standard legislative bargaining models assume that an agreed-upon allocation is final, whereas in practice, there exist mechanisms for challenging passed legislation when there is lack of sufficient consensus. Such mechanisms include popular vote requirements following insufficient majorities in the legislation. This paper analyzes a legislative bargaining game whose outcome can be challenged through a referendum. I study the effects of this institution on the bills passed in the legislature and analyze the incentives they provide for reaching grand bargains. The proposer party's trade-off between an expensive partner and a threatening opponent in the referendum summarizes the bargaining problem. The results indicate that it is possible to observe surplus coalitions formed in equilibrium even though smaller coalitions are sufficient for the passage of a bill and that measures of post-bargaining power do not necessarily translate into higher equilibrium payoffs. Moreover, disparities in campaigning resources incentivize challenge procedures. These results carry policy implications for various forms of post-bargaining power, such as caps on campaign contributions.
