Endogenous limits on veto power in dynamic bargaining

Abstract

We consider an infinitely repeated legislative bargaining model with a dynamically evolving status quo. Three players, one of whom is permanently endowed with veto power, must split a fixed budget in each period. Despite her additional power, the veto player cannot always asymptotically extract the full surplus. The non-veto players endogenously prevent each other's expropriation when they are patient and have high initial allocations in the unique stationary, symmetric, stage-undominated, coalition-proof Markov perfect equilibrium. Further, we show that veto power and higher recognition probability may be strategic substitutes rather than complements. We also provide an intuition behind selfish egalitarianism between non-veto players. Our technique of employing coalition-proofness and iteratively generating a new equilibrium with novel predictions sheds light on the divergence in recent literature on the value of veto power and may be useful in other environments.