Brexit: Compromise Under Threat

Helios Herrera has very diverse research interests, ranging from Political Economy to Applied Theory, Macroeconomics, Experimental Economics, and Financial Economics. He has published in many top journals, such as the Journal of Political economy, the Review of Economic Studies, the Journal of the European Economic Association, the American Journal of Political Science, the Economic Journal and the Journal of Public Economics.

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Abstract

We study how a walk-away threat ending negotiations affects welfare and gridlock in the ratification of deals/treaties. In every period, an agreement needs to be ratified by two opposing parties. Agreement failure provokes either an extension and a (freshly renegotiated) amended agreement to be ratified or a “hard outcome” (worse than any possible deal) and an end to the negotiation. A walk-away threat can be announced strategically by either party (or by third parties). We show that such threats do improve the scope for agreement, but also entail costs. In the symmetric case, only highly credible threats are beneficial: when an agreement is unlikely to begin with, threats with low credibility only reduce welfare by increasing the equilibrium chance of a hard outcome. In the general case, the advantaged party typically benefits from walk-away threats even for low credibility threats, as these shift the expected agreement in his favor. The disadvantaged should threaten to walk-away only if highly credible.