Collaborative Research: Veto Bargaining: Delegation and Non-Coasian Dynamics

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This award funds research on the topic of veto bargaining. Veto bargaining concerns situations in which one agent or group can make proposals but another must approve them. Applications can be found in many areas of the social sciences: legislatures (e.g., U.S. Congress) propose bills that executives (e.g., the President) can veto; criminal prosecutors bring charges that judges and juries decide whether to convict a defendant on; CEOs and Boards need shareholders to sign off on certain decisions; and search committees put forward candidates but the decision of whether to hire rests elsewhere in an organization. The central issue the research will take up concerns the uncertainty proposers face about the preferences of those with veto power—which proposals they are willing to accept relative to the status quo. Using game theory, the PIs will theoretically investigate how such uncertainty affects bargaining and the resulting outcomes. They will explore applications and implications in some of the contexts noted above. It is hoped that the research will contribute to both the theoretical and practical understanding of veto bargaining, and provide some methodological insights.The PIs will adopt a framework of Proposer-Vetoer bargaining over a “spatial dimension” of actions or policies; i.e., the agents have single-peaked preferences. Vetoer’s preferences are her private information. The first part of the project will take a mechanism design approach to identify Proposer-optimal outcomes when Proposer has full commitment. This approach will be useful both normatively and positively. A connection will be made to optimal delegation. Among other things, the results will show that under reasonable conditions incomplete information can dramatically corrode Proposer’s bargaining power, while still resulting in efficient outcomes. Comparative statics will be obtained concerning the Proposer’s risk aversion and the alignment of preferences between Proposer and Vetoer. The second part of the research project will study a dynamic model in which Proposer has limited commitment. That is, he/she cannot commit to not coming back to Vetoer with a proposal in the next period should the current proposal be rejected. The results from the first part of the project will be used to understand how bargaining is affected by limited commitment. A familiar intuition when players are patient is that of Coasian dynamics: regardless of the commitment solution, Proposer’s lack of commitment should erode his/her bargaining power and lead to Vetoer getting her ideal outcome, perhaps modulo some minimum “outside option” payoff to Proposer. The PIs anticipate showing that this intuition fails here, owing to single-peaked preferences. In particular, it is anticipated that under some conditions there will be non-Coasian dynamics, with Proposer obtaining her commitment payoff.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.