CeDEx workshop - Jan Zapal (Institute for Economic Analysis Barcelona)

Explicit and implicit status-quo determination in dynamic bargaining: Theory and application to FOMC directive

Abstract:

The paper analyses recurring group decision making problems under uncertainty regarding future preferences of the actors involved, problems faced by many real world committees. The need for continuity in policy making implies that past decisions play an important role in determining subsequent ones, creating dynamic procedural linkages. In this context we compare two bargaining protocols: i) the implicit status-quo protocol under which present period policy serves as the status-quo for the next period and ii) the explicit status-quo protocol under which the decision in the current period involves both current policy and a (possibly different) status-quo for the ensuing period. We show that the two bargaining protocols lead to notably different policy outcomes. In Stationary Markov Perfect equilibrium, unique under slight refinement, the difference is most marked in the periods of common interest. These are still characterized by disagreement under implicit status-quo bargaining, while under explicit status-quo bargaining they lead to the policy decisions that fully reflect the congruent preferences of the committee members. Furthermore, the former bargaining protocol leads quickly to gridlock with constant policy unresponsive to the varying preferences in the committee, something the latter bargaining protocol does not deliver. However, the implicit status-quo protocol prevents abuse of proposal power, which is possible under the explicit status-quo. With this insight, we re-interpret explanations for the existence of 'asymmetry' in the Federal Open Market Committee (FOMC) directive.