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). 1021
Reelection 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 domestic government DG1 may be replaced by a new domestic 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 assume that this publicly observed preference shock is drawn from a uniform distribution with support [ − σ, σ]. This shock can capture an unanticipated worsening 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 incoming Greek government found that, under a previous 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 relatively 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 election 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 datetwo 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, instead, the project was not implemented at date one, then the status quo transfer (i.e., starting point for datetwo 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 proposal. The parameter θ could reflect intrinsic bargaining power or institutional features of the agreement that determine who can initiate renegotiations. We allow for arbitrary θ ∈ [0, 1] to emphasize that results do not depend sensitively on the distribution of future bargaining 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 transfer. Otherwise, the inherited terms from past negotiations 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 transfer if and only if DG2 executes the agreement by implementing 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 uncertainty about DG2’s valuation v2 D. One can also interpret 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, renegotiation 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
Peter Buisseret and Dan Bernhardt date one,that is,if r =1,then the status quo transfer s2 Finally,if the date-two surplus from agreement is is the transfer b that DG accepted.If the project was negative;that is,if Equation(1)does not hold,then no not implemented,that is,if r =0,then the status quo amendment will be agreed upon,as the joint surplus transfer that serves as the starting point for date-two from implementing the project is negative.The project negotiations is s2 =s1. will not be implemented and all agents receive date- Because there are no bargaining frictions,the project one payoffs of zero. will be implemented at the terminal date t =2 if and The expected date-two payoff of a domestic agent only if the associated surplus is positive;that is,if and with date-one project valuation v who anticipates that only if the DG2 will have project valuation vp and face status quo transfer s2 is thus v2+1+vF≥0←→入≥-(2+UF) (1) VD(v,vp,s2)= (v+s2+)f()d Even though the date-two implementation decision -(+) does not depend on date-one actions,the division of (听+s2 the surplus depends on (a)the status quo transfer and (v-v哈+(u哈+入+vF)f()d. (b)the shock realization A. Suppose,first,that DG2 has a high enough project (3) valuation p+A that it would receive a positive pay- off from implementing the project when it receives the The expected date-two project payoff of FG given s2 status-quo transfer s2: when it faces DG2 with valuation v is 令 2+1+52≥0←→入≥-(u哈+s2) (2) Vr(2,s2) (vF-s2)f()d -(听+s2) With probability 6,DG2 is recognized to propose a modification to the inherited terms,s2.Because DG2 (1-)(2+入+vF)f(2)d.(4) & prefers higher transfers,it never proposes a transfer (vD+UF) b2<S2.Further,a proposal that raises the transfer to b2>s2 will fail:if Equation (2)holds,FG recognizes A transfer of power from a friendly date-one domestic that DG2 will implement the project even if the initial government DG to a more hostile date-two domestic agreement is not amended.As a result,FG would reject government DG2(i.e.,from to v)carries two implica- the amendment,because a threat by DG,to renege on tions.First,it increases the prospect that DG2 can rene- the inherited agreement is not credible.With residual gotiate the initial terms to a more favorable arrange- probability 1-0,FG gets to propose a modification. ment.Second,it lowers the total surplus of the date-two Although FG would like to negotiate a reduced trans- negotiating parties.As a result,there will be situations fer,DG2 will refuse such amendments-it prefers to in which a hostile DG2 will fail to reach an agreement maintain the existing terms,which offer more favorable with FG in contexts where a more project-friendly DG2 concessions in return for implementing the project. would have successfully concluded the negotiation. Suppose,instead,that DG2 anticipates a negative value from implementing the project at the status-quo Discussion:The bargaining protocol is starker than transfer;that is,Equation(2)fails.This means that it necessary for our main results.What is crucial is that would prefer not to implement the project at date two the terms that the domestic government obtains at date unless the initial terms were amended to a higher trans- two improve as its valuation of the project falls,rela- fer.Suppose,first,that the surplus from agreement is tive to the status quo offer.This improvement in terms positive;that is,Equation(1)holds. holds regardless of the distribution of date-two bar- With probability 0,DG2 gets to propose a modifica- gaining power,6[0,1].When the domestic govern- tion to the inherited terms.If FG rejects the proposal, ment holds date-two proposal power,a more hostile the project will end when Equation(2)does not hold, representative can renegotiate the status quo transfer giving FG a payoff of zero.Thus,DG2 can renegoti- from s2 up to b2 Ur.When,instead,the FG holds pro- ate the date-two transfer from s2 to the larger transfer posal power,its offer holds the date-two domestic gov- b2=vF.That FG is held to its participation constraint ernment to its participation constraint,but its transfer is not essential-what matters is that there is a disconti- b2 =-(vp+)still increases as the domestic govern- nuity in the terms that DG2 can obtain when its threat ment becomes more hostile;that is,as vp decreases.A to break the existing agreement is credible;that is,at more hostile representative not only captures the up- the threshold on A defined in Equation(2).With prob- side of larger concessions-it also mitigates against the ability 1-0.FG is,instead,recognized.Since Equation downside of subsequent appropriation. (2)fails,FG must offer DG2 a larger transfer to secure its participation.It then raises the transfer from s2 to POLICY OUTCOMES AT DATE ONE b2 =-(vp+),leaving DG2 with value vp+A indif- ferent between implementing the project and quitting, Exogenous Power Transitions.In our benchmark set- allowing FG to claim the rest of the surplus for itself. ting,the date-two domestic government's (DG2's) 1022
Peter Buisseret and Dan Bernhardt date one, that is, if r1 = 1, then the status quo transfer s2 is the transfer b1 that DG1 accepted. If the project was not implemented, that is, if r1 = 0, then the status quo transfer that serves as the starting point for date-two negotiations is s2 = s1. Because there are no bargaining frictions, the project will be implemented at the terminal date t = 2 if and only if the associated surplus is positive; that is, if and only if v2 D + λ + vF ≥ 0 ⇐⇒ λ ≥ −(v2 D + vF ). (1) Even though the date-two implementation decision does not depend on date-one actions, the division of the surplus depends on (a) the status quo transfer and (b) the shock realization λ. Suppose, first, that DG2 has a high enough project valuation v2 D + λ that it would receive a positive payoff from implementing the project when it receives the status-quo transfer s2: v2 D + λ + s2 ≥ 0 ⇐⇒ λ ≥ −(v2 D + s2 ). (2) With probability θ, DG2 is recognized to propose a modification to the inherited terms, s2. Because DG2 prefers higher transfers, it never proposes a transfer b2 < s2. Further, a proposal that raises the transfer to b2 > s2 will fail: if Equation (2) holds, FG recognizes that DG2 will implement the project even if the initial agreement is not amended.As a result, FG would reject the amendment, because a threat by DG2 to renege on the inherited agreement is not credible. With residual probability 1 − θ, FG gets to propose a modification. Although FG would like to negotiate a reduced transfer, DG2 will refuse such amendments—it prefers to maintain the existing terms, which offer more favorable concessions in return for implementing the project. Suppose, instead, that DG2 anticipates a negative value from implementing the project at the status-quo transfer; that is, Equation (2) fails. This means that it would prefer not to implement the project at date two unless the initial terms were amended to a higher transfer. Suppose, first, that the surplus from agreement is positive; that is, Equation (1) holds. With probability θ, DG2 gets to propose a modification to the inherited terms. If FG rejects the proposal, the project will end when Equation (2) does not hold, giving FG a payoff of zero. Thus, DG2 can renegotiate the date-two transfer from s2 to the larger transfer b2 = vF . That FG is held to its participation constraint is not essential—what matters is that there is a discontinuity in the terms that DG2 can obtain when its threat to break the existing agreement is credible; that is, at the threshold on λ defined in Equation (2). With probability 1 − θ, FG is, instead, recognized. Since Equation (2) fails, FG must offer DG2 a larger transfer to secure its participation. It then raises the transfer from s2 to b2 = −(v2 D + λ), leaving DG2 with value v2 D + λ indifferent between implementing the project and quitting, allowing FG to claim the rest of the surplus for itself. Finally, if the date-two surplus from agreement is negative; that is, if Equation (1) does not hold, then no amendment will be agreed upon, as the joint surplus from implementing the project is negative. The project will not be implemented and all agents receive dateone payoffs of zero. The expected date-two payoff of a domestic agent with date-one project valuation v who anticipates that the DG2 will have project valuation v2 D and face status quo transfer s2 is thus VD(v, v2 D,s2 ) = σ −(v2 D+s2 ) (v + s2 + λ)f(λ) dλ + −(v2 D+s2 ) −(v2 D+vF ) (v − v2 D + θ (v2 D + λ + vF ))f(λ) dλ. (3) The expected date-two project payoff of FG given s2 when it faces DG2 with valuation v2 D is VF (v2 D,s2 ) = σ −(v2 D+s2 ) (vF − s2 )f(λ) dλ + −(v2 D+s2 ) −(v2 D+vF ) (1 − θ )(v2 D + λ + vF )f(λ) dλ. (4) A transfer of power from a friendly date-one domestic government DG1 to a more hostile date-two domestic government DG2 (i.e., from v to v) carries two implications. First, it increases the prospect that DG2 can renegotiate the initial terms to a more favorable arrangement. Second,it lowers the total surplus of the date-two negotiating parties. As a result, there will be situations in which a hostile DG2 will fail to reach an agreement with FG in contexts where a more project-friendly DG2 would have successfully concluded the negotiation. Discussion: The bargaining protocol is starker than necessary for our main results. What is crucial is that the terms that the domestic government obtains at date two improve as its valuation of the project falls, relative to the status quo offer. This improvement in terms holds regardless of the distribution of date-two bargaining power, θ ∈ [0, 1]. When the domestic government holds date-two proposal power, a more hostile representative can renegotiate the status quo transfer from s2 up to b2 = vF .When, instead, the FG holds proposal power, its offer holds the date-two domestic government to its participation constraint, but its transfer b2 = −(v2 D + λ) still increases as the domestic government becomes more hostile; that is, as v2 D decreases. A more hostile representative not only captures the upside of larger concessions—it also mitigates against the downside of subsequent appropriation. POLICY OUTCOMES AT DATE ONE Exogenous Power Transitions. In our benchmark setting, the date-two domestic government’s (DG2’s) 1022 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