CAN NEGOTIATION ENVIRONMENTS, WITH UNCERTAIN PUBLIC OPINION, AFFECT WELL-BEING?

Responsible researcher: Eduarda Miller de Figueiredo

Original title: Gambling over Public Opinion

Authors: Deepal Basak and Joyee Deb

Location of Intervention: -

Sample Size: -

Sector: Public Sector

Variable of Main Interest:-

Type of Intervention: Political Negotiation

Methodology: Game Theory

Summary

            Public opinion is used as a tool for credible compromise. However, in many political situations, it is only discovered after negotiations begin. In this article the authors examine negotiation environments with uncertain public opinion and costly compromise, and ask when bargaining impasses arise and the welfare implications of these impasses. They demonstrate two exercises, in which one there is no balance and the other there is a single and symmetrical balance. The authors conclude that the final policy may be “over-responsive” to new information and adversely affect well-being.

1. Policy Problem

In many negotiation situations, public opinion is used as a tool for credible compromise. However, in many situations, public opinion is not really known at the time the negotiation begins, but is only discovered later. For example, in the United States in 2012, just weeks before the impending fiscal cliff, many Republican politicians remained steadfast in their vote in favor of spending cuts. It was a credible stance since it was part of the promise to his own voters, so a possible retreat from that stance would mean a loss of credibility and a cost of reputation that could negatively impact his chances of re-election.

The disagreement in bargaining as the players' attempt to build a reputation for being tough, in a scenario with asymmetric information on both sides, was explained by Abreu and Gul (2000), through the so-called reputational bargain. Fanning (2018) presents uncertainty in costs that is resolved at a future date, showing that if the probability of the type of commitment converges to zero, then there may be disagreement.

The objective of the article analyzed here was to examine negotiation environments with uncertain public opinion and costly compromise, and to question when bargaining impasses arise and the welfare implications of these impasses.

2. Implementation and Evaluation Context

             The authors studied a two-stage bilateral negotiation process in a two-party representative democracy (RD), in which the environment has three main characteristics:

1. It is interpreted as a bipartisan DR model and therefore public opinion is one-dimensional. In other words, greater support for one party implies less support for the other party.
2. If either party gives up its initial bargaining position, it will suffer a cost that will depend on the fraction of the public that favored it. Therefore, a party with greater support is more difficult to make concessions.
3. If a party retreats from its initial position, the cost it faces will depend on the extent of the concession. Reflecting the idea that the public does not uniformly punish all concessions, because backing out on a large scale from an initial demand is more evident.

• Policy/Program Details

In representative democracy (RD), there are two parties i (left) and j (right) that are negotiating about how to allocate 1 billion dollars between military spending and education. Party i wants to spend the entire amount on education, while j wants to spend the entire amount on the military. When the state of the world, here defined by , is positive, then there is a low threat of war.

At the beginning of the game, both parties simultaneously publish their demands. When the parties are at an impasse, the game moves to the next phase and the state of the world ( ) is observed. Studies are commissioned by independent agencies, and as study reports are published, everyone becomes aware of the threat of war. Consequently, public opinion is formed about which party position is best, that is, each voter decides which party to support.

After observing public opinion, the parties negotiate again to see who will give in. This phase occurs as a negotiation game of alternating offers à la Rubinstein (1982), with frequent offers:

1. One of the parties is chosen at random to make the first concession.
2. If the other party accepts this demand, a deal is made and the game ends. Otherwise, it continues to the next round.
3. In the next round, the other party makes the demand and the same process continues until an agreement is reached.

It is important to note that parties suffer reputational costs if they make concessions, which depends on the size of the concession and public opinion. Where a larger concession is more obvious to the public and is more likely to affect the credibility of one of the parties. Therefore, greater public support for party i makes the party more willing to wait.

In the standard bargaining equilibrium of alternating offers, the party that is more willing to wait has an advantage. Thus, in equilibrium party i needs to receive a larger share.

4. Assessment Method

            From the entire demonstration of how a negotiation would happen, the authors present a simple example to illustrate the theory described previously. They demonstrate that there is no settlement equilibrium, as well as explicitly characterizing the unique symmetric pure strategy game equilibrium.

5. Main Results

Given that ideal points and the state of the world are evenly distributed, the distribution of public support is not necessarily uniform, see what was discussed previously.

Given the initial demands and the distribution of public support to the parties, when one party makes a greater demand than the other, party i obtains zero public support with positive probability and can never obtain full political support. Therefore, there is no balance.

When the parties demand more than , it is known that a greater initial demand implies a greater magnitude of concession. As the cost of the commitment increases over the length of the concession, two effects occur:

1. A higher demand gives the player more leverage, thus increasing what he gains in the second stage of bargaining. It also increases the perceived cost of the commitment.
2. A higher initial demand means the party will end up getting less public support, reducing its leverage.

            From this, there will be a unique symmetric pure strategy game balance.

            Finally, the authors also point out that when negotiation goes to the second stage, one or both parties have to compromise after public opinion is revealed, and must bear the associated costs of compromise. However, according to the authors, this commitment cost incurred by the parties may not be an important reason to worry about disagreement. Indeed, for them, a byproduct of the impasse between the two interested parties is that the final agreement depends on new information emerging about the desirability of competing alternatives. Where the final policy choice may result in greater public welfare than the agreement in the first stage because it responds to this new information.

6. Public Policy Lessons

            The authors demonstrate in the article that, in political negotiation, public opinion is used as an instrument of credible compromise. In which, when the parties do not know where the public stands when they begin to bargain, then under a wide set of conditions, the parties prefer to bet on public opinion. In other words, they make incompatible demands and wait to see which way public opinion moves before making a compromise.

            They point out that it is possible to conjecture that this improves public well-being compared to a case in which this information is not incorporated. However, they demonstrate that this is not true. And ultimate policy may respond “too much” to new information and adversely affect well-being.

References

Abreu, Dilip and Faruk Gul. 2000. “Bargaining and Reputation”. Econometrica 68 (1): 85-117.

Fanning, Jack. 2018. “No Compromise: Uncertain Costs in Reputational Bargaining.” Journal of Economic Theory 175 (May): 518-55.

Rubinstein, Ariel. 1982. “Perfect Equilibrium in a Bargaining Model.” Econometrica 50 (1): 97-109.