Ideologies, status quo, and parties’ outside options in parliamentary politics

• Published date: 01 September 2016
• Date: 01 September 2016
• Author: C. C. Yang,Tsung‐Sheng Tsai
• DOI: http://doi.org/10.1111/ijet.12094

doi: 10.1111/ijet.12094

Ideologies, status quo, and parties’ outside options in

parliamentary politics

Tsung-Sheng Tsai∗and C. C. Yang†

This paper discusses the effect of the status quo policy versus parties’ “outside options,” which

are defined as the benefits when parties are not in government, on the determination of the

political equilibrium in parliamentary politics. As the value of outside options increases, the

status quo becomes less important relative to outside options in terms of the parties’ bargaining

strength. It is shown, among other things, that if the value of outside options is intermediate, two

extreme parties may form a “disconnected coalition”in equilibrium; and if the value of outside

options becomes sufficiently high, the status quo no longer maintains its grip on outcomes and

the median-voter theorem holds in essence.

Key wor ds status quo, outside option, government formation, parliamentary system

JEL classification C78, D72, D78

Accepted 21 February 2015

1 Introduction

Parliamentary systems are prevalent in Europe and in some Asian countries, and the determination

of their policies has received muchattention in the literature. In parliamentary systems, governments

are formed through a coalition of different parties, whose seats in the legislature are determined in

elections. Voters anticipate the policies that would be chosen by the governments that might form

and then cast their votes which further decide the representativesand par ties’seats in the parliament.

Therefore, a political equilibrium is a result of a legislative equilibrium, a government formation

equilibrium, and an electoral equilibrium.

In an important paper, Baron and Diermeier (2001) (hereafter BD) consider a sequential model

of election, government formation, and legislation in a parliamentary system with three parties,

proportional representation, and a two-dimensional policy space. Parties form a coalition in order

to adopt a policy which replaces the status quo. Thus, parties are allowed tomake transfers of office-

holding benefits to implement efficient coalition bargaining. In the proto-coalition bargaining, the

status quo indeed plays an important role in that the formateur (i.e., the party selected to try to form

a government) prefers to form a government with the party that is more disadvantaged by the status

quo policy. This is because the more disadvantaged a party is the more willing it will be to make

office-holding concessions to the formateur in order to obtain policy changes from the status quo.

∗Department of Economics, National TaiwanUniversity, Taipei,Taiwan. Email: tstsai@ntu.edu.tw

†Institute of Economics, Academia Sinica, Taipei, Taiwan.

Wethank a referee for his/her valuable comments on the paper.

International Journal of Economic Theory 12 (2016) 279–297 © IAET 279

International Journal of Economic Theory

Status Quo and Outside Options in Politics Tsung-Sheng Tsai and C. C. Yang

Indeed, as BD demonstrate, if both of the other parties are substantially disadvantaged by the status

quo, it will be attractive for the formateur to form a consensus government.

BD assume that when the government fails to form, all the office-holding benefits vanish and

all parties obtain nothing except for the utility derived from the status quo policy. This assumption

imposes the restriction that the reservation price of any party is completely determined by the status

quo policy. In this paper we relax this restriction. More specifically, we assume that there are two

kinds of non-policy benefits: office-holding benefits and other non-policy benefits. While a party

can enjoy office-holding benefits if it is in government (say, pecuniary rewards and political power

related to being a member of the cabinet), the party can still receive other benefits if it is not in

government. These kinds of benefits that a party can enjoy even if it is excluded from government

can be viewed as “outside options.”

In bargaining models, it has been well acknowledged that outside options can crucially affect the

bargaining outcomes and allocation processes. In parliamentary politics, the outside options can be

referred to as the gain a party can secure if it walks away from the bargaining table – the “walk-away

values,” in the words of Lupia and Strøm (2010). These values may come from the public support

which allows the party not to be tied to a specific coalition agreement. A party may prefer to remain

outside the government, rather than joining a coalition which entails taking some decisions that

would alienate their supporters and that would be punished at future elections. In other words, if a

party anticipates a large future electoral gain when it refuses to join the government, its walk-away

value can be higher, which means that it enjoys a higher value of outside options. In this sense, a

party’s outside options are closely related to the party’s image or reputation which would affect the

public support in the elections.

Another source of a party’s outside options is the alternative governments that might possibly

form if the current one fails to continue. In the literatureon multilateral bargaining , a player’s outside

option has been defined as the maximum utility he could obtain by entering an alternative coalition

(see Bennett 1997). Thus, if a party has the opportunity to be a member of more than one possible

coalition, it can obtain a higher walk-away value, for if the other parties do not concede its demands,

it will join a different coalition which may lead to the termination of the current government. If

such a threat is credible, a party can then have more bargaining powerand g reaterpolitical influence.

These potential benefits can be characterized as the outside options; the more outside options a party

has, the more portfolio and policy concessions it can extract.

In the BD model, the voters’ non-policy benefit is normalized to zero and, at the same time,

a party’s non-policy benefit is also set to zero if it is not in government. As a result, there is no

distinction between general voters and members of parliament whose parties are not in government.

We incorporate outside options into the BD model and explore the implications for parliamentary

politics. The important message of our paper is that the equilibrium outcomes in parliamentary

democracies are sensitive to both the outside options and the status quo.

Moreover,BD consider a two-dimensional policy space, assuming that the parties’ ideal policies

are symmetrically located so that party ideology plays no role in their framework. We instead follow

Austen-Smithand Banks (1988) to adopt a one-dimensional policy space so that a party ideology such

as a left-wing, right-wing, or centrist ideology can play its part. This modification enriches the orig inal

BD model; we are now able to discuss the interesting issue of “connectedness” in parliamentary

politics: will the formateur always want to form a coalition with a partner located next to him on the

ideological spectrum? The BD model provides no insight into such a question because the parties in

their model cannot be classified on a left–right scale.

It is shown that, when the value of outside options is relatively small, the equilibrium outcomes

are similar to those in BD, except that a consensus government can form in a minority rather than

280 International Journal of Economic Theory 12 (2016) 279–297 © IAET