Joyee-Deb.pdf - Gambling over Public Opinion∗ Deepal...

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Gambling over Public Opinion * Deepal Basak Indian School of Business Joyee Deb Yale University April 2018 Abstract We consider bargaining environments where two agents make demands, following which public opinion forms. Agents then bargain again, and suffer costs of compro- mise if they scale back their initial demands. If public favors one agent’s position, it is more costly for her to compromise. In a simple model with symmetric uncertainty about public opinion, we show that there is a unique equilibrium in which agents never make compatible demands in the first stage, rather take a gamble over public opinion. This implies inevitable welfare loss with at least one party making a costly compro- mise. We analyze how the extent of gambling varies with the distribution of public opinion. * We are grateful to Barry Nalebuff, Rahul Deb, Simone Galperti, Parikshit Ghosh, Navin Kartik, Alessan- dro Lizzeri, Larry Samuelson, and Jidong Zhou for their helpful comments. We thank Mayur Chaudhary for excellent research assistance.
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1 Introduction In many bargaining situations, public opinion is used as a tool for credible commitment. Bargainers who have strong public support can more easily convince their opponents that they will not back down from their position. For instance, domestic public opinion can lend credibility to a politician’s tough stance in international negotiations. 1 This is because it is understood that if a politician has the public mandate, but ends up softening his position, he would face significant domestic political costs ( Fearon ( 1994 )). 2 In 2012, just weeks before the impending fiscal cliff, many Republican politicians held firm on their vote in favor of spending cuts. Their stance was credible because it was integral to their promise to their own constituents and, backing down would involve reputational costs and had the potential to adversely impact their re-election probabilities. However, in many situations, public opinion is not really known with certainty at the time bargaining starts, but rather evolves over time. Yet bargaining parties stick to their positions until it becomes finally clear that the public favors one side or the other, and this determines who finally gives in. Consider the following examples: In case of the fiscal cliff in 2012, there was initially no clear understanding of what the public opinion was, and both Republicans and Democrats held firm in their respective positions for the longest time. 3 In December 2012, a Gallup poll found that public opinion had moved: “Sixty-two percent of Americans would like to see federal government leaders compromise on an agreement... more than twice the 25% who want leaders to stick to their principles...” ( Jones ( 2012 )). It became increasingly clear that the public wanted the Republicans to compromise. Finally, shortly before the deadline, enough Republicans did back down to avert the fiscal cliff.
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