An important class of bargaining problems involve two negotiators who send signals to a third party. We show that these signaling incentives significantly influence (1) the proposals that they offer and (2) their decisions to accept or reject proposals. Consider the following case: Congress makes a take-it-or-leave-it offer (a bill) to the president, who either signs or vetoes it. A third party is uninformed about the president's preferences; however, by observing the bill that Congress writes and the president's veto decisions, it can learn about these preferences. Since in our model the president wants to appear moderate to voters, while Congress wants him to appear extreme, Congress sometimes writes a bill that it knows the president will veto. Thus, despite Congress and the president being completely informed, an uninformed third party causes the outcome to be Pareto inefficient. The model generates many empirical predictions, and we test one of these - that the president's approval rating should drop after a veto.
All Science Journal Classification (ASJC) codes
- Sociology and Political Science
- Political Science and International Relations