Gambling over Public Opinion

Deepal Basak and Joyee Deb

American Economic Review, 2020, vol. 110, issue 11, 3492-3521

Abstract: We consider bargaining environments in which public opinion provides leverage by making compromises costly. Two parties make initial demands, before knowing the public opinion. If deadlocked, they can bargain again after public opinion forms, but suffer reputation costs if they compromise, i.e., scale back their demands. We show that in equilibrium, parties may choose to make incompatible demands initially and gamble over public opinion even though one or both parties must bear a cost later. We characterize when deadlocks arise, and how this affects the welfare of the public in a representative two-party democracy compared to a direct democracy.

JEL-codes: C78 D72 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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DOI: 10.1257/aer.20181495

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