Take-it-or-leave-it Ooers When a Third Party I S W Atching

An important, but largely unexplored, class of bargaining problems involve two negotiators, who send signals to a third party. One of the most important, but simple, cases within this class is the policy-setting process between Congress and the president. We develop a model where Congress makes a makes a take-it-orleave-it o er to the president (a bill), who either accepts or rejects (signs or vetoes) it. A third party, a set of voters, is uninformed about the president's preferences; however, by observing the bill that Congress writes and the president's veto decision, the voters can learn about these preferences. In our model the president wants to appear moderate to voters, while Congress wants him to appear extreme. As a consequence, Congress sometimes prefers to write a bill that it knows the president will veto instead of writing a compromise bill that they both prefer to the status quo. Thus, despite Congress and the president being completely informed, the presence of an uninformed third party causes the outcome to be Pareto ine cient. The model generates many empirical implications, and we test one of these|that the president's approval should tend to drop after a veto. Data from 1956 to 1992 strongly support the hypothesis. A veto of a major bill causes the president's approval to drop approximately two percentage points|approximately double the e ect of a one-percentage-point drop in GDP. \All these arguments having been weighed, Bill Clay sent a memo to Bill Ford on February 25 regarding family leave. As one committee chairman to another, Clay was informing Ford that e orts to avert a veto through some form of negotiated settlement had