Endogenous Coalition Formation in Contests

This paper analyzes coalition formation in a model of contests with linear costs. Agents first form groups and then compete by investing resources. Coalitions fight for prizes that are assumed to be subject to rivalry, so their value is non-increasing in the size of the group. This formulation encompasses as particular cases some models proposed in the rent-seeking literature. We show that the formation of groups generates positive spillovers and analyze two classes of games of coalition formation. A contest among individual agents is the only stable outcome when individual defections leave the rest of the group intact. More concentrated coalition structures, including the grand coalition, are stable when groups collapse after a defection, provided that rivalry is not too strong. Results in a sequential game of coalition formation suggest that there exists a non-monotonic relationship between the level of underlying rivalry and the level of social conflict.Contests, coalition formation, conflict, rivalry.

Conflict as a Part of the Bargaining Process: Theory and Empirical Evidence

This paper explores the role of conflict as a bargaining tool. It first presents a simple bargaining model with one-sided incomplete information. Parties can choose the scope of the confrontation they may want to engage in: A limited conflict that only introduces delay, or an absolute conflict that terminates the game. The outcomes of both types of confrontation are driven by the relative strength of the parties that is only known to one of them. Therefore, the non-final conflict conveys information about the eventual outcome of the absolute one. In this framework, it is shown that confrontation has a double-edged effect: It may paradoxically open the door to agreement when the uninformed party is so optimistic that no agreement is feasible. But it can also create inefficiency when agreement is possible but the informed agent has an incentive to improve her bargaining position by fighting. The second part of the paper performs a duration analysis on a sample of colonial and imperial wars fought between 1817 and 1988. The results offer evidence illustrating the use of conflict in negotiations.Conflict, Bargaining, Incomplete information, Duration analysis.

Bargaining and Conflict with Incomplete Information

This paper studies bargaining and conflict under incomplete information, provides an overview and a critical account of the literature on the topic and contributes with original research. We first revise models of mechanism design and sequential bargaining that take confrontation as final. Conflict and inefficiencies are to be expected in these models whenever parties have optimistic prospects on the outcome of the all-out conflict. After examining the causes and reasons for this optimism, we move to the analysis of the recent literature that considers the existence of limited confrontations that allow bargaining to resume. In the presence of private information, these limited conflicts convey information and thus become a bargaining instrument. The paper closes with a discussion on the related empirical literature, the challenges that it faces and some potential avenues for further research.Bargaining, Conflict, Incomplete information, Power, Optimism, Hicks paradox, Uneven contenders paradox.

On the Social Efficiency of Conflict

In sharp contrast with the economic literature on conflict, this paper shows that confrontation may be efficiency enhancing. Conditions are derived under which a contest over the exclusive control of a resource Pareto dominates open access. When the population size is big enough or production exhibits strong decreasing returns to scale, agents unanimously prefer to engage in conflict.

(Don't) Make My Vote Count

Proponents of proportional electoral rules often argue that majority rule depresses turnout and may lower welfare due to the 'tyranny of the majority' problem. The present paper studies the impact of electoral rules on turnout and social welfare. We analyze a model of instrumental voting where citizens have private information over their individual cost of voting and over the alternative they prefer. The electoral rule used to select the winning alternative is a combination of majority rule and proportional rule. Results show that the above arguments against majority rule do not hold in this set up. Social welfare and turnout increase with the weight that the electoral rule gives to majority rule when the electorate is expected to be split, and they are independent of the electoral rule employed when the expected size of the minority group tends to zero. However, more proportional rules can increase turnout within the minority group. This effect is stronger the smaller the minority group. We then conclude that majority rule fosters overall turnout and increases social welfare, whereas proportional rule fosters the participation of minorities

The disadvantage of winning an election

This paper analyzes the problem that an incumbent faces during the legislature when deciding how to react to popular initiatives or policy proposals coming from different sources. We argue that this potential source of electoral disadvantage that the incumbent obtains after being elected can jeopardize the reelection possibilities of the incumbent. We analyze the decision of the incumbent when facing reelection and we characterize the conditions under which the advantages that the incumbent obtains can overcome the disadvantages. Finally, we use the results of this analysis to discuss some implications of the use of mechanisms of direct democracy like referenda and popular assemblies on electoral competition.Incumbency advantage, Referenda, Popular initiatives, Elections.

Optimism and commitment: An elementary theory of bargaining and war

We propose an elementary theory of wars fought by fully rational contenders. Two parties play a Markov game that combines stages of bargaining with stages where one side has the ability to impose surrender on the other. Under uncertainty and incomplete information, in the unique equilibrium of the game, long confrontations occur: war arises when reality disappoints initial (rational) optimism, and it persist longer when both agents are optimists but reality proves both wrong. Bargaining proposals that are rejected initially might eventually be accepted after several periods of confrontation. We provide an explicit computation of the equilibrium, evaluating the probability of war, and its expected losses as a function of i) the costs of confrontation, ii) the asymmetry of the split imposed under surrender, and iii) the strengths of contenders at attack and defense. Changes in these parameters display non-monotonic effects.Conflict, Income redistribution, Natives, Immigrants.

The Emergence of Institutions

This paper analyzes how institutions aimed at coordinating economic interactions may appear. We build a model in which agents play a prisoners’ dilemma game in a hypothetical state of nature. Agents can delegate the task of enforcing cooperation in interactions to one of them in exchange for a proper compensation. Two basic commitment problems stand in the way of institution formation. The first one is the individual commitment problem that arises because an agent chosen to run the institution may prefer to renege ex post. The second one is a “collective commitment” problem linked to the lack of binding agreements on the fee that will be charged by the centre once it is designated. This implies first that a potentially socially efficient institution may fail to arise because of the lack of individual incentives, and second that even if it arises, excessive rent extraction by the institution may imply a sub-optimal efficiency level, explaining the heterogeneity of observed institutional arrangements. An institution is less likely to arise in small groups with limited endowments, but also when the underlying commitment problem is not too severe. Finally, we show that the threat of secession by a subset of agents may endogenously solve part of the second commitment problem.Institution, Coordination, State of nature, Secession.

Does Market Concentration Preclude Risk Taking in Baking?

We analyse risk-taking behaviour of banks in the context of a model based on spatial competition. Banks mobilise deposits by offering deposit rates. We show that when the market concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, all banks choose the prudent asset to invest in, and some depositors may even be left out of the market. Our results suggest a discontinuous relation between market concentration and social welfare.Financial intermediation, Risk-taking, Market concentration