Dynamic Coalitions

Policy-making is a dynamic process in which policies can be changed in each period but continue in the absence of new legislation. We study a dynamic legislative bargaining game with an endogenous status quo where in each period a dollar is allocated with a proposal voted against the allocation in the previous period. We characterize for any initial status quo a class of simple Markov perfect equilibria (MPE) with dynamic coalitions, where a dynamic coalition is a decisive set of legislators whose members support the same policy, or set of policies, in at least two consecutive periods. In the basic model a dynamic coalition persists throughout the game, and coalition members share the dollar equally in every period. If uncertainty is associated with the implementation of a policy, there is a continuum of allocations supported by coalition MPE in which the originator of the coalition receives a share larger than the coalition partner receives but smaller than in sequential legislative bargaining theory. These coalition equilibria have the same allocation in every period when the coalition persists, but with positive probability the coalition dissolves due to the uncertainty. Coalition MPE also exist in which members tolerate a degree of implementation uncertainty resulting in coalition allocations that can change from one period to the next. The dynamic coalitions are minimal winning, form in the first period, and, if a coalition dissolves, a new coalition is formed in the next period. The predictions of the theory are compared to experiment results. JEL Classification: C73, D72