Dynamics of Government and Policy Choice
Abstract. We present a dynamics theory of government formation and policy choice built on the single-period model of Baron and Diermeier (QJE 2001). In our setup, the parties are far-sighted and they care about both policy outcomes and side payments collected in the bargaining process. In every period the status quo is the policy chosen in the previous period. We identify Pareto inefficiency due to a bargaining effect and construct stationary Markov perfect equilibria with Markov transitions between minimum winning coalitions and consensus coalitions. Inefficiency and frequence of consensus coalitions are both increasing in the discount factor of the parties.