July 22,2015Working Paper No. 2128
We present a theory of dynamic coalitions for a legislative bargaining game in which policies continue in effect in the absence of new legislation. We characterize Markov perfect equilibria with dynamic coalitions, which are decisive sets of legislators whose members strictly prefer preserving the coalition to having it end. Dynamic coalitions satisfy internal stability and exclusion risk conditions. They can be minimal winning or surplus and can award positive allocations to non-coalition members. Policies supported can be efficient or inefficient. Vested interests can support policies that no legislator would propose if forming a new coalition. If uncertainty is associated with policy implementation, a continuum of policies are supported. These equilibria have the same allocation in every period when the coalition persists. Dynamic coalitions also exist in which members tolerate a degree of implementation uncertainty, resulting in policies that can change without the coalition dissolving. We compare to experimental results.