Veto players and policy adaptability: An intertemporal perspective

Abstract

The capacity to sustain policies over time and the capacity to adjust policies in the face of changing circumstances are two desirable properties of policymaking systems. Veto player theory, a very influential approach in comparative politics, has suggested that polities with more veto players will have the capacity to sustain policies at the expense of the ability to change policy when necessary. This paper argues that once intertemporal considerations are explicitly included, it is not necessarily true that polities with more stable and credible policies have more difficulty in adapting their policies, nor that polities with more veto players have more difficulty in adjusting policies to new circumstances. More generally, the paper argues that, when studying the effects of political institutions on policy outcomes, an intertemporal perspective might lead to predictions different from those emanating from more a-temporal approaches.

Keywords

Intertemporal politics policy adaptability policy reform policy stability veto players

1. Veto players and policy adaptability: an intertemporal perspective

Scholars have been preoccupied for several decades with the problem of credibility of government policy, since similar policies can produce different outcomes depending on the extent to which economic agents believe that the policy will be sustained. A policy can produce the desired outcomes only if it is credible. This concern for the impact of credibility has been very salient in the literature on macroeconomic policy that emphasizes the time-inconsistent incentives of benevolent policymakers: even policymakers who attempt to maximize social welfare may choose to default on their promises and change policies later on.¹ The problem is even more pressing when more realistic assumptions about the motivations of policymakers are considered and when agency problems and conflict of interests (associated, for example, to partisan politics) are taken into account. Once one goes beyond the view of government as a unified actor, the structure of political institutions becomes crucial for understanding the ability of governments to commit to any given policy direction. Various institutional arrangements have been identified as conducive to more credible economic policy. For example, sometimes the structure of the polity itself can make policy change unlikely, as when there are many veto players. When that is not the case, there are alternatives for embedding policy rigidities or introducing specific procedural mechanisms to make policy change difficult. In this line of research, the ability of governments to change policy is feared, and the stability of policies is valued.

On the other hand, many scholars have been concerned about the ability of governments to change policy when such policy change is deemed necessary. This issue, the capacity to adjust policy, has been central in the context of macroeconomic stabilization, of structural reforms in developing and transition countries, and in the context of welfare state retrenchment in developed economies.² This capacity has been referred to alternatively as reform capacity, decisiveness, flexibility, or adaptability (we will use this latter term). In this case also, different configurations of political institutions have been considered as more favorable for facilitating or denying the necessary policy change. For example, it is generally thought that a smaller number of veto players facilitates those required policy adjustments.

The capacity to change previous policies when necessary and the capacity to sustain policies when that is desirable are seen in various corners of the literature as conflicting objectives. One salient example of the perceived stability–adaptability trade-off is provided by the literature on ‘Rules versus Discretion’ in macroeconomics. Rules are a form of taking discretion away from policymakers, a device thought to increase policy predictability and credibility, often at the cost of making it unresponsive to shocks. Looking at the effects of political institutions on policy stability and policy adaptability, predominant views take for granted the presence of such a trade-off. A very well-known corpus of comparative political analysis uses the logic of veto player theory and argues that polities with more veto players are expected (ceteris paribus) to be more able to commit to policy but less able to adapt their policies, and that the opposite is true for countries with fewer veto players.

Veto player theory is a line of inquiry, pioneered by George Tsebelis (1995, 2002), of great saliency in comparative politics. Veto player logic has been applied to the study of welfare states, inequality, government spending, fiscal adjustment, tax competition, monetary policy, monetary institutions, inflation, international trade arrangements, the business environment, the rule of law, European Union decision-making, and various other important issues.³ A veto player is an actor whose consent is necessary to change policy. Any given constellation of veto players can be characterized by its number, the distribution of preferences, and the internal cohesion of collective veto players. Tsebelis places these configurations in a spatial representation and utilizes social choice concepts, such as the size of the unanimity winset (or unanimity core), to derive predictions about the likelihood of policy change. Other things being constant, a higher number of (effective) veto players implies a lower likelihood of policy change (more policy stability in the definition of Tsebelis).

There are, then, two assertions that are implicit in much conventional wisdom and explicit in the veto player literature: (A1) A more decisive polity must necessarily be less resolute (Haggard and McCubbins, 2001), or ‘high level of commitment’ is another way of saying ‘inability for political response’ (Tsebelis, 2002: 204); and (A2) as the effective number of veto players increases, the polity becomes more resolute and less decisive (Haggard and McCubbins, 2001), or equivalently, many veto players make significant policy change difficult or impossible (Tsebelis, 2002).

Most previous discussions of the theory of veto players concentrate on one or the other of these two ideas, typically A2, but we believe that it is useful to examine both ideas at the same time. In this paper we challenge the generality of those two assertions. We do that by adding a dimension missing in standard veto player logic so far, the intertemporal dimension.⁴ Veto player theory tends to focus on decisions made at a particular moment in time, ignoring the strategic linkage of choices over time. Among the applied studies using veto player logic, most focus on particular instances of policy reforms, with given configurations of veto players and their preferences at one point in time. Static veto player analysis seems quite sufficient to study those situations and that may explain the empirical relevance of the approach. However, for the more broadly comparative study of the effects of political institutions, we believe that an intertemporal perspective of the institutional structure of veto players over time is quite relevant. Seeing policymaking from an explicitly intertemporal perspective opens up various new channels, absent in one-shot interactions, which affect the way in which political institutions influence policy decisions. Some of these channels, as we argue in the next section, might lead to potential reversion of predictions, such as A1 and A2, obtained without taking them into consideration. Having more veto players, as a comparative institutional exercise, means not only more veto players today, but also in the future; this affects the likelihood that any current veto player is also a veto player in the future, and this might lead to different choices than if there was no tomorrow. Also, in the context of repeated games, more veto players at one point in time might make deviations from cooperative equilibria less appealing and lead to more cooperative policymaking, which allows for efficient adjustments but prevents opportunistic adjustments.

The next section provides a brief introduction to the general logic of seeing and modeling policymaking from an intertemporal perspective, and summarizes in an intuitive manner the specific channels exemplified in the two models presented in Sections 3 and 4. Section 5 reviews some extant empirical results in light of our theoretical approach, and suggests possible ways of going about a more comprehensive empirical analysis of some of the issues raised here. Section 6 concludes by relating our analysis to some broader discussions in comparative politics and suggests some further steps in developing an intertemporal approach to the study of the effects of political institutions on policies.

2. The framework

In this paper we follow a vast literature in transaction cost and intertemporal economics and politics, and look at the policymaking process as a process of exchanges (transactions) over time. Different actors at different points in time might have different amounts of power to influence the making of policy. The way they use that power can be very different if they behave as if there is no tomorrow than if they take into account the effects their current actions will have on future play of the game.

Seeing policymaking from this perspective opens up various channels that might lead to potential reversion of predictions, such as A1 and A2, obtained from perspectives that do not take such intertemporal channels explicitly into consideration. There are a number of theoretical mechanisms, reflecting characteristics of intertemporal politics in the real world, giving reasons why such results might come about. A first step for any such mechanism to function is moving from one-period models of policymaking to multi-period models of policymaking.

In the example of Section 3 below, we show that prediction A2 of veto player theory obtains in a one-period model, but it is reversed in an extension to a two-period model if one adds the strategic possibility (relevant in practice, but irrelevant in a one-period model) of introducing policy rigidities (that is, designing policies in the present in such a way that it is very difficult to change them in the future). The example also brings home an important general point for the analysis of the effects of political institutions on policymaking and policy. Political institutions allocate decision power not only at a given point in time, but also over time. As an exercise in institutional comparative statics, ‘increasing the number of veto players’ means comparing situations in which the number of veto players is larger not only at one point in time, but also in the future. The fact that there are ‘more seats’ in the future affects the likelihood that any given current veto player might also be a veto player in the future, and this intertemporal consideration might provide incentives for ‘better’ choices by veto players in the present. For instance, it may reduce their incentives to embed rigidities into future policies.

In the example of Section 4 we go all the way to an infinitely repeated game, a natural framework for the study of intertemporal policymaking. Within such a framework we show that cooperation in a repeated game context might permit some polities to have both more stability (avoiding opportunistic adjustments) and more adaptability (permitting efficient adjustments) than those polities that are unable to enforce cooperative policymaking, contrary to assertion A1 of veto player theory. We also show that more veto players might make the deviation from such cooperative equilibrium less appealing, and in that way more veto players might facilitate intertemporal cooperation and hence policy adaptability (contrary to assertion A2 of veto player theory).

The two examples, meant to highlight intertemporal channels affecting the effects of political institutions on policymaking and policies, share some common characteristics. There are a fixed number of political actors with different preferences over some policy vector. The economy is subject to shocks that call for policy adjustment, which is beneficial for all players. (Many relevant economic policies exemplify this situation, in which there is conflict of interests while at the same time there is a common interest in economic adjustment, with fiscal policy being the most obvious example.)⁵

Following the definition of veto players, political institutions are such that, at any point in time, the agreement of a (proper or not) subset of the players is necessary for policy to change. Veto players in each period will be those that get to sit at a table where unanimity is required in order to change policies. These seats (‘veto gates’ in the wording of Shugart and Haggard, (2001) and Cox and McCubbins (2001) can be occupied by different players at different points in time.

The political power of different actors changes over time.⁶ Players in this intertemporal set-up are all those who might occupy a seat at the table at some point, not only those currently at the table. In order to study the choices of those currently at the table one needs to know not only who they are and what their preferences are, but also the nature of the process assigning those seats over time, as well as the preferences of those outside the table today but who might sit at some point in the future. Such intertemporal considerations do not tend to appear explicitly in many applications of veto player logic.

To focus our institutional comparative statics we take the distribution of preferences of players as given (and as sufficiently heterogeneous), and we change the number of (veto) players sitting at the table. This enables us to focus the discussion on the number of players, which in such a set-up is equivalent to the number of effective veto players in the more general set-up of veto player theory (Tsebelis, 2002). Also, we assume that all players are unitary players in order to simplify the analysis. Our general point does not depend on these assumptions, which are made for operational simplicity.

In terms of specifics, the models of the next two sections differ in the number of players (three in one case, N in the other); in the specification of preferences/policy set-up (a canonical two-dimensional spatial example, a canonical distributive problem); in the time horizon (two periods, an infinite number of periods); and in the exact nature of the intertemporal linkages (through a technology of policy insulation, through strategic behavior). This serves to stress the fact that the results do not depend on a particularly contrived configuration of modeling features. More importantly, the two examples illustrate different channels by which intertemporal considerations might overturn predictions from static veto player approaches.

Throughout the analysis we define a policy profile as being adaptable if it responds adequately to economic shocks, and as stable if it does not change for reasons other than those economic shocks.

3. Policymaking over time, policy rigidities, and the role of veto players

In this section we construct a very simple example, extending a workhorse social choice example to a two-period setting. The point of the model is just to illustrate one possible mechanism by which intertemporal considerations can overturn ‘static’ veto player theory predictions. We show that if we focus our analysis just at one point in time (a one-period game), the larger the number of veto players the lower the likelihood that policy will change with respect to any given status quo, as made abundantly clear by veto player theory. However, one can get different results by adding a very simple intertemporal structure. The intertemporal structure we use here consists of having a second period and allowing players in the first period to decide whether to use a technology that sets policy in stone so that it cannot be changed in the second period. There are various mechanisms by which future policies might be heavily constrained by current choices. These include writing policies into the constitution, entering into international agreements where there are high exit penalties imposed by other countries or international organizations, embedding heavy delegation structures that make policy change very difficult, and adopting policies that induce responses of private economic actors that greatly increase exit costs.⁷

Under what conditions will political actors want to introduce such policy rigidities? The benefit would come from insuring themselves against an adverse political configuration tomorrow, in which their interests might not be taken into consideration in policy choice; the cost is that whoever is in power tomorrow will lose the ability to adjust policy in response to future economic shocks. It turns out that the former fear might be mitigated if there is a greater chance that the current decision-makers will be sitting at the table in the future. In general, the greater the number of (veto) actors at the table in the future, the more likely each player who is present today will also be there in the future. So, by this mechanism, it is possible that a polity with a larger number of veto players will be better able to adjust policy in response to shocks.

3.1. The set-up

The simple model we present here is a common example of the archetypical spatial policymaking problem in public choice (see, for instance, Mueller, 2003), and it is also close to the canonical example in the intuitive exposition of veto player logic in Tsebelis (2002).⁸ After presenting the set-up, the analysis proceeds in two steps. In the first step we study a one-period model that generates results analogous to those of veto player theory. In the second step we introduce intertemporal considerations in the context of a two-period model and show that, under some conditions, results could be different from those emerging from the one-period model.

3.1.1. The economic/policy environment

There are three players (i = A,B,C), with preferences in a two-dimensional policy space over public goods x₁ and x₂. Let Y = {x₁,x₂} be a policy vector. Each player has an ideal point Y_i and their utility decreases with the Euclidean distance from their ideal point to any policy vector, so that they have circular indifference curves. For brevity of exposition, let the three ideal points Y_A, Y_B, and Y_C constitute the vertices of an equilateral triangle within the (compact) set of feasible policy vectors Ψ ⊆ ℜ². (Let d represent the distance between any two ideal points.) Imagine, for instance, that the economy consists of these two public goods and a numéraire private good x₀, and that A prefers relatively low levels of both public goods (since he likes private consumption more), B likes public good x₁, and C likes public good x₂. In that case their ideal points can be as represented in Figure 1.

Let the two-dimensional vector Θ represent the state of technology or the state of exogenous economic factors. Let Θ have distribution F(θ₁,θ₂), with mean (0,0) and variance covariance matrix $[\begin{matrix} σ^{2} & 0 \\ 0 & σ^{2} \end{matrix}] .$ Θ could represent the relative cost of transforming the private good x₀ into each of the two public goods x₁ and x₂. Imagine a vector of positive shocks Θ to represent a state of the world in which the cost of transforming x₀ into x₁ and x₂ is quite low, and that production and consumption elasticities are such that all players want then to consume more of both x₁ and x₂; in that case the shock will move everybody’s ideal points in the northeast direction to, say, Y_i + Θ. Assuming that to be the case, utility (measured by the square of the distance from actual policy to the policy vector preferred by player i given state of the world Θ) can be represented as U_i(Y,Θ) = −║Y. − (Y_i +Θ.)║².

3.1.2. Political institutions

Political institutions are the rules that specify who gets to sit at the decision table and which decision procedures are used there. Following the logic and definition of veto players, we will work under the maintained assumption that the decision procedure is unanimity; that is, the consent of all (veto) players at the table will be required to change policy from any given status quo. Our comparative institutional analysis will consist of varying ν, the number of (veto) players sitting at the table. We will focus on comparing an institutional set-up with 2 veto players with an institutional set-up with 3 veto players.

Let μ be a state variable that represents the relative political power of various players. (We omit time subscripts initially, since our first model will be a one-period one, but μ_t varying over time will be an important part of our argument in the intertemporal formulation.) μ can take values μ_ijk, with ijk representing an ordering of players A,B, and C. Given political institutions (summarized by ν), the realization of μ will tell us who are the political actors holding those veto positions. For instance, if μ = μ_ACB and ν = 2, then players A and C will be sitting at the decision table. Given our simple three-player example, there are six possible orderings of the players. Let p_ijk be the probability of each ordering.

3.1.3. Some notation

As stated, our comparison of alternative political institutions will consist of comparing set-ups with ν = 2 to set-ups with ν = 3. Let P_ν(μ,Θ) be the Pareto set under political institutions ν when the political state is μ and the economic state is Θ. The Pareto set, also called unanimity core, is the set of points that cannot be defeated by unanimity by any other point. For instance, for any given Θ, if ν = 3, the Pareto set will be the area of the triangle with vertices (Y_A+Θ), (Y_B+Θ), and (Y_C+Θ). If ν = 2 and μ = μ_ijk, the Pareto set will be the segment $\bar{(Y_{i} + Θ) (Y_{j} + Θ)}$ . Let |P_ν(μ,Θ)| denote the area of the set P_ν(μ,Θ).

3.2. A one-period model

Consider the following one-period set-up. There is an exogenous status quo policy vector Y₀, then the random variables μ and Θ realize, and then the ν veto players sitting at the table decide Y₁. Unanimity among them is required in order to pick a Y₁ different from Y₀. It is easy to see that (if there are no costs associated with changing policy) the policy chosen will have to belong to P_ν(μ,Θ). In the case of ν = 2, the chosen policy vector will belong to the segment between the ex-post ideal points of the two players favored by μ. In the case of ν = 3, the chosen policy vector will belong to the triangle with vertices in the three ex-post (inclusive of) ideal points.

Policy Y₁ will be unchanged with respect to the status quo policy Y₀ if it so happens that Y₀ ∈ P_ν(μ,Θ), since in that case at least one of the veto players will reject any proposal to change policy. Otherwise, policy will adjust to the economic shocks Θ. (The exact location of policy in that case will depend on the details of the bargaining protocol within the table.) The ex-ante probability of not observing a policy change will be equal to the probability that the location of the status quo Y₀ and the realization of the random vectors Θ and μ are such that Y₀ ∈ P_ν(μ,Θ). If we compare such probability in the two institutional scenarios ν = 2 and ν = 3, it is easy to see that the probability of policy remaining at the status quo is greater when ν = 3, since |P₃(μ,Θ)| > |P₂(μ,Θ)|. That is the well-known result (A2) from veto player theory that adding new veto players increases policy stability (reduces the likelihood of policy adjustment).⁹

3.3. A two-period model with intertemporal linkages

Let us consider now the following game. Period 1 starts with a given status quo Y₀; then, the random variables μ₁ and Θ₁ realize; after that, the ν veto players sitting at the table decide two things: Y₁ as before, and also whether to utilize a policy technology that will enable them to fix their policy choice Y₁ into the second period. Let T ∈ {0,1} represent such choice, where T = 1 means embedding such policy rigidity (so that T = 1 implies Y₂ = Y₁), while T = 0 means not doing that.

In period 2, Y₁ and T are inherited from the past, and the random variables μ₂ and Θ₂ realize. The economic shock process is a random walk, so that Θ₂ is the sum of Θ₁ plus another realization from the same process. After the random variables realize, the ν veto players of that period convene and decide policy Y₂ (if T = 0), and the world ends.

We analyze this set-up using backward induction, focusing for brevity on the decision whether to fix policy or not. We consider first the case of ν = 2, and compare to the case of ν = 3 below.

In the second period, if T = 1, there is not much to choose, and Y₂ = Y₁ independently of the realization of μ₂ and Θ₂. If T = 0, then Y₂ ∈ P₂(μ₂,Θ₂) as in the one-period game. In order to evaluate whether to fix Y₁ (in the first period) into the second period, players will have to ponder the individual costs and benefits of doing so. Under what circumstances will a player want to tie the hands of future decision-makers? In an ex-post sense, whether a player wishes to have had policy fixed or not will depend on whether he is sitting again at the table, and on the size of the new economic shocks (compared to preference heterogeneity).

In the ex-post nodes where he is again one of the veto players, he prefers policy to be free, since in that case he could always veto undesirable changes (and hence warrant himself the same utility as if the policy had been fixed). In the ex-post nodes where he is excluded from the second period decision table, there are circumstances under which he would have desired to veto, but would be unable to do so. This would be more likely when Θ₂ is close to Θ₁, so that there is no great need to adjust to a new state of the world, and in cases in which d is large, so that the new point chosen by the other players is far from his own preferred point. It is easy to show that there are parameter values for which all players will desire to set T = 1. The likelihood of policy being fixed is decreasing in σ², the variance of economic shocks, and increasing in d, preference heterogeneity.¹⁰

Consider now the case of ν = 3. In this case, given that players are certain of sitting at the table in the next period, they will never want to fix policy into the future, since such a choice will make them suffer the cost of having policy maladjusted to economic shocks without any additional gain in preventing opportunism, since they can always do that by vetoing undesirable policy proposals ex-post. Intuitively, setting T = 1 is equivalent to vetoing policy change for every possible node at time two, while by being at the table with probability one, they can selectively veto only undesirable changes.

Comparing the cases with two and three veto players, we see that policy is more likely to be made rigid (and hence, unresponsive to shocks) in the case with fewer veto players, contradicting assertion A2 of veto player theory. The motivation for policy insulation comes from a traditional concern of transaction cost economics (Williamson, 1996) and transaction cost politics (Dixit, 1996; North, 1990), fear of future opportunism by other players. We can see that such concern will depend on the intertemporal allocation of political power, a feature not explicitly considered in approaches such as veto player theory so far. The probability of being excluded from future coalitions is decreasing in the number of veto players. In this particular example with three players, the probability jumps to zero when moving from ν = 2 to ν = 3, but the result is more general: the larger the number of institutional veto players, the more likely each current actor occupying one of those gates will be there in the future, and hence less likely policy insulation will be.¹¹

Notice that the inefficiencies introduced by insulating policy out of fear of future opportunism can be interpreted as the consequence of the inability of players to commit not to behave opportunistically in the future. Again, this is a classical result in transaction cost economics and transaction cost politics. Bringing those general insights to the discussion about the role of various political institutions (in this case the number of veto players), one is left to ponder under what conditions will political institutions ameliorate or worsen those commitment and credibility problems. A natural framework for thinking about those issues is the study of reputation in the context of repeated games, to which we turn next.

4. Intertemporal cooperation: the role of veto players

The theory of repeated games is a natural vehicle to think about policymaking from an intertemporal perspective, to verify what type of policy agreements can be implemented over time, and to look into the effects of various institutional configurations on the likelihood of such agreements. We argue that cooperation in a repeated game context might permit some polities to have both more stability and more adaptability than others that are unable to enforce cooperative policymaking (contradicting assertion A1 of veto player theory). Furthermore, we provide an example in which having more veto players facilitates cooperative policymaking and hence induces more stability (as in static veto player theory) and more adaptability (contradicting assertion A2 of veto player theory).

The way in which any parameter of a game affects equilibrium outcomes in repeated games is richer than in the context of static games. The (institutional) parameter of interest for this paper is the number of veto players. There are a number of channels by which v can have the effect of increasing the likelihood of cooperation, and hence facilitating policy adjustment. One such channel is the one we explored in the previous section, the increased likelihood of being at the decision table in the future. In this section we provide an example in which we explore another channel of influence of the number of veto players. A higher v will make the deviation from a cooperative equilibrium less profitable, since the gains from such an opportunistic short-term behavior will, in that case, need to be shared with more (veto) players.

The model is a repeated divide-the-dollar game in which the efficiency of any allocation at each point in time is a function of random events that materialize over time. Before presenting the formal aspects of the model, it is useful to motivate its basic structure with some familiar examples. Imagine that we are to allocate an annual budget for visiting faculty at a small university in a faraway place like Buenos Aires. The university is organized in N departments. The committee in charge of allocating money for visiting faculty is composed of v members, coming from different departments (v < N), and it has to make its decisions by unanimity. Given the university is located a little far from the geographical center of international academia, it has difficulties in attracting great scholars. But occasionally, the opportunity of attracting a first-rate academic arises; a Nobel laureate economist might feel like spending the northern summer near the wonderful trout fishing opportunities of Patagonia, or a distinguished political scientist might feel like spending her sabbatical in the world capital of tango. Given the significant reputational externalities for the University of having a top academic around, those circumstances will call for an allocation of the budget quite loaded in favor of the department that faces such an opportunity in any particular year.

A similar intuition operates at the level of a country’s budget. There are various circumstances that arise over time that might require reallocating budget in some particular directions. Say the economy has been hit by a natural disaster that requires the reconstruction of public infrastructure. Or there is a potential threat of military conflict with a neighboring country, which calls for more spending on military equipment and new recruits. Or it seems beneficial for aggregate welfare to alter international trade policy in a direction more favorable for some sectors.

Beyond budget-allocation situations, the model could also be interpreted as a set of independent random issues arising over time, leading to the possibility of changing from a given status quo (here normalized as zero payoffs for everyone). Each new issue would require some sort of action, but different actions would be evaluated differently by different players (alternative new policies would lead to different distributive and efficiency outcomes). The different intensity of preferences of different players across different issues will open up room for the intertemporal exchanges we emphasize here (as in Weingast and Marshall, 1988).

We will show that whether the polity in question is able to move resources (adjust policies) in the necessary direction will depend on the relevant actors’ ability to strike agreements for intertemporal cooperation. Also, the probability of being able to cooperate over time will depend on some parameters of the model, including the number of veto players.

4.1. The set-up

4.1.1. The economic/policy environment

Imagine a polity composed of N players. For concreteness imagine that these players are political parties, each of which is a perfect agent for a perfectly homogeneous socioeconomic constituency or ‘sector.’ These parties interact repeatedly and discount the future at a common factor δ ∈ (0,1). Each player maximizes an objective function $\sum δ^{t} U_{i} (Y_{t}, Θ_{t}) .$

Let Θ_t be a vector that characterizes the state of the world at time t, that is the economic, societal, and environmental conditions on which policy operates. As stated, in the context of this model we will say that policy is adaptable if it responds adequately to the state of the world Θ, and that policy is stable if it does not change for reasons other than Θ.

Let Y_t be the vector of policies at time t. Policies are constrained to belong to a set Ψ of feasible policies. Policies will map into welfare levels (utility) for the players, conditional on the state of the world Θ_t. Policies will be valued differently under different conditions (e.g., irrigation projects are valued more if droughts rather than floods are expected, but farmers will tend to value irrigation projects more than city dwellers). The specification of the payoff function U(.) that we use below reflects that mix of conflicting and common interests in a simple manner. Similarly, we assume a simple formulation for the stochastic process Θ_t and the way in which it affects the connection between policies and welfare.

In order to capture the heterogeneity of preferences among players, we will depict the policy game as, in part, a purely distributive game, in which Y_t is a vector of shares x_it of a given budget to be given to each party i.¹² The element of common interest in responding to shocks is captured by the fact that the different distributions of shares are not neutral in terms of efficiency. In each period, depending on the realization of economic shocks, different allocations will be associated with different sizes of the total pie. In practice, we push the simplicity of the latter assumption to the extreme and assume that it is optimal to give the whole pie to a particular sector that received ‘the shock.’

We simplify the vector Θ_t to the scalar θ_t, which takes values 1,2…N, each with probability 1∕N, indicating which ‘sector’ is more productive (or more needy, in an insurance interpretation) in each period. Let the set of feasible policies Ψ be the unit N-simplex (so that $\sum_{i} x_{i t} = 1$ and x_it ≥ 0), and the payoff of each player in each period will be

U_{i} (Y_{t}, Θ_{t}) = x_{i t} + α I (Y_{t}, Θ_{t}),

where I(Y_t,Θ_t) is an indicator function that takes the values

I (Y_{t}, Θ_{t}) = {\begin{matrix} 1, \\ 0, \end{matrix} \begin{matrix} if \\ otherwise . \end{matrix} \begin{matrix} x_{j t} = 1 \end{matrix} \begin{matrix} f o r \end{matrix} \begin{matrix} j = θ_{t} \end{matrix}

This formulation for the Θ_t process will imply that if θ_t takes the value j it would be welfare-enhancing to have policies favoring sector j in period t. For concreteness we interpret x_it as shares of a budget received by each party, and each player cares about his own share as well as about an externality received if the budget is allocated in the most efficient way—in this simple example, giving the entire budget to the favored sector. Nothing substantial will change, only the tediousness of the algebra, if we assume a smoother formulation where the optimal allocation is not a corner solution and where preferences are not linear. The ‘budget’ interpretation facilitates the exposition (and some linearity assumptions facilitate the algebra), but the formulation can easily stand for more general sets of policies that map into payoffs for each player, with elements of conflict of interest (captured by the feasible set of policies restricting the sum of utilities), and of common interest in the right type of policy adjustment, captured by the second term of the payoff function. To make the problem interesting, we assume α < 1; otherwise anyone would always choose the optimal allocation in a trivial manner.

4.1.2. Political institutions

The political decision-making process consists of ν < N (veto) players sitting at the decision table in each period and making a decision through some bargaining protocol. The final voting rule is unanimity, as implied by the definition of veto players. Who gets to sit at the table in each period is determined by the power allocation rule μ_t. We will assume for simplicity that each of the N players has an identical probability ν∕N of being a veto player at time t.¹³ This can be thought of as a political system with N parties, where ν of them will form the government at any point in time, and in which all the parties are symmetrical ex ante and have the same chances of being part of the government. For concreteness and simplicity of exposition, we use a particular specification for the bargaining protocol among veto players: a one-round closed rule. The political state variable μ_t partitions the set of players into three subsets in each period: player a_t, the agenda setter; a subset containing the other (ν − 1) veto players of time t who will vote on the proposal made by a_t; and the rest of the players, who are outside the table.

In each period, after the random variables μ and θ are realized, the agenda setter a_t will propose an allocation, a vector $Y_{t}^{a} = {x_{1 t}^{a}, x_{2 t}^{a}, \dots, x_{N t}^{a}}$ . After that, the other (ν − 1) veto players of the period will vote.¹⁴ If every voter votes in favor, then the allocation implemented will be equal to the one proposed by the agenda setter, $Y_{t} = Y_{t}^{a}$ . Otherwise, every player obtains a status quo payoff, which we normalize to 0 for notational simplicity.¹⁵

4.2. Analysis

Standard usage in applied work on repeated games postulates strategies that support first-best allocations as part of a cooperative equilibrium, and compare the implications with those of non-cooperative equilibria, such as the infinite repetition of stage game equilibria. We follow that practice here. In this case, the first-best policies resulting from cooperation are both stable and adaptable—they adjust to shocks but do not change for other reasons. On the contrary, non-cooperative equilibria (such as the infinite repetition of the one-shot Nash equilibrium) lead to policies that are neither stable nor adaptable. We perform comparative statics analysis of the effects of exogenous parameters on cooperation, and we show that a larger number of veto players v increases the chances of cooperation, and hence stability and adaptability.

We start by analyzing non-cooperative equilibria. The stage game has only one equilibrium, in which the agenda setter proposes an allocation giving slightly above zero (their status quo alternative) to each of the other veto players (zero in the limit), nothing to those outside the table, and keeps almost the entire budget.¹⁶ As is well known from the theory of repeated games, the infinite repetition of the one-shot subgame perfect equilibrium is also an equilibrium in the repeated game for any δ. In this non-cooperative equilibrium, policies do not adjust to economic shocks θ (they are not adaptable), while they do move around depending on who happens to be the agenda setter of the period (they are not stable). This equilibrium gives the players an expected value of

V^{N} = (\frac{1}{1 - δ}) (\frac{1 + α}{N}) .

This is because in expected value each player gets to keep the whole budget one out of N periods, and receives the externality α each time the agenda setter happens to be the player receiving the shock θ_t, an event that also occurs with probability 1∕N.

On the contrary, the first-best allocation that maximizes utilitarian social welfare gives the entire budget to the player who received the shock θ_t. That is $Y^{*} (θ_{t}) = {x_{i t}^{*}}$ , with

x_{i t}^{*} = {\begin{matrix} 1 & for & i = θ_{t} \\ 0 & for & i \neq θ_{t} . \end{matrix}

This policy leads to expected welfare

V^{*} = (\frac{1}{1 - δ}) (\frac{1}{N} + α) .

Clearly V^* > V^N; the difference with the non-cooperative case lies in the fact that now the positive externality is realized every period.

Following a common usage in the literature, we build a strategy to induce first-best cooperation focusing on a simple punishment strategy of reverting to non-cooperation (to the actions prescribed by the unique equilibrium of the one-shot game) forever.¹⁷ Cooperation requires the agenda setter proposing the first-best allocation and the other veto players voting in favor of it. This leads to the payoff V^*. In the (absorbing) punishment path everybody receives V^N. Using the ‘one-shot deviation principle’ (Mailath and Samuelson, 2006: Section 2.2) we verify under what conditions or parameters it is true that deviations from cooperation are not profitable. The player with the greatest incentive to defect is the agenda setter—in the cases in which he/she is not at the same time the representative of the sector that received the productivity shock θ_t. If an agent who happens to be the agenda setter of the period were to deviate, he would need to consider the possible reaction of the other (ν − 1) veto players in order to ascertain his payoff from the deviation. Imagine a proposal different from Y^* (θ_t) was made. Take as given the action of the other (ν − 2) veto players as accepting the deviant proposal, and consider the decision of one of the veto players of the period (other than the agenda setter). If he accepts the deviant proposal, it is implemented in that period and the play of the game switches to non-cooperation forever after. If he rejects it, everyone gets zero in that period, but the equilibrium remains cooperative forever after. In comparing these two options, voter i will pay special attention to how much the deviant proposal gives him, $x_{i t}^{a}$ . Define x⁰ as a critical value such that i accepts the proposal if and only if it gives him $x_{i t}^{a} \geq x^{0}$ . The player will be indifferent, then, if he were to receive x⁰ in his deviation, that is if 0 + δV^* = x⁰ +δ V^N. This implies that $x^{0} = (\frac{α δ}{1 - δ}) (\frac{N - 1}{N})$ . The most profitable deviation for the agenda setter that might be accepted will then offer $(\frac{α δ}{1 - δ}) (\frac{N - 1}{N})$ to each of the other (ν−1) veto players and will give zero to everyone outside the table. Such a strategy will allow him to keep $1 - (ν - 1) (\frac{α δ}{1 - δ}) (\frac{N - 1}{N})$ in the deviation period. That deviation will be worthwhile as long as $1 - (ν - 1) (\frac{α δ}{1 - δ}) (\frac{N - 1}{N}) + δ V^{N} > α + δ V^{*}$ . The converse needs to be true in order for our equilibrium to be sustained, which is equivalent to what we express in the following Lemma.

Lemma: Under the proposed strategies, cooperation implementing the first-best allocation can be sustained if and only if $(\frac{δ}{1 - δ}) \geq (\frac{N}{N - 1}) (\frac{1 - α}{α}) (\frac{1}{ν})$ .

As standard, it is easier to sustain cooperation when players are more patient (larger δ). Cooperation is also more likely the higher the weight of the factor of common interest α. More central to the point of this paper, the inequality in the condition is relaxed (that is, cooperation is more likely) by having a larger number of veto players ν. That is because the more veto players, the less profitable it is for each of them to deviate from cooperation, since they have to split the gains from the opportunistic deviation among more people (in our simple formulation this is seen just in the payoff of the agenda setter, but it would affect all of them if we had a different bargaining protocol within the table). Having more veto players, then, reduces the incentives to deviate from cooperation, making cooperation sustainable over a larger set of parameters. In the usual parlance, having more veto players ‘makes cooperation more likely.’

Cooperation in the intertemporal game leads to the optimal allocation that is perfectly responsive to economic shocks θ_t, and not responsive to other circumstances (such as who happens to be the agenda setter). In contrast, in the non-cooperative equilibrium, policy does not adjust adequately to economic shocks, while it might vary for unrelated reasons, so that it is ‘unstable.’ If different polities were in different equilibria, our model predicts a positive correlation between stability and adaptability across countries (contrary to assertion A1 of veto player theory). It also leads to the possibility (literally true in the example) that more veto players increase both stability and adaptability (contrary to assertion A2 of veto player theory). In the next section we discuss the way in which these results can be connected to the extant empirical veto player literature, as well as present some preliminary evidence consistent with the predictions of this model.

5. Towards empirics

We have argued that the inclusion of intertemporal considerations might lead to predictions that differ from the ones stemming from static applications of veto player logic. The models of the last two sections have identified some specific channels by which such results might come about. In this section we briefly review some extant empirical results in light of our theoretical approach, and suggest possible ways of going about a more comprehensive empirical analysis of some of the issues raised here.

Even though there is a substantial applied literature finding confirmation of veto player theoretical predictions, summarized for instance in Tsebelis (2002) and Hallerberg (2010), there are also a number of studies that have provided evidence that may question the generality of the veto player hypotheses. In his survey of empirical applications of veto player analysis, Hallerberg (2010) finds that the evidence for countries transitioning from communist regimes has been less confirmatory of the veto players approach. For instance, Hellman (1998) argues that increasing the number of parties in government increases the degree of change from the status quo. Furthermore, Gehlbach and Malesky (2010), looking at the experiences of economic reform in Eastern Europe and the former Soviet Union, find not only that reforms have been greater in countries with more veto players, but also that reform reversals have been also less likely in such countries. Even though Gehlbach and Malesky have an interesting interpretation in terms of the role played by interest groups (non-institutional actors often ignored in veto player analysis, as well as in this paper), their results are also consistent with the predictions of our models: more veto players might lead to better intertemporal policymaking, leading to both more adaptability (implementing the necessary reforms) and more stability (not reversing those, according to the authors, welfare-enhancing reforms).¹⁸

Some evidence that goes against the veto player conventional intuitions has also been found in studies of welfare retrenchment and of pension reform in various European contexts. Looking at pension system reform in Central and East European countries, Guardiancich and Orenstein (2011, p. 1) find that ‘the “enabling constraints” of more inclusive institutions can support radical and durable change’ (again a result that relates both adaptability and stability to more veto players). The broadest overview of pension reform to date, the Oxford Handbook of West European Pension Politics (Immergut et al., 2007) finds that the veto player model fails to account for the intensity of pension reform in European welfare states, with cases of countries with many veto players adopting significant legislation. Lindvall (2010) highlights these results and provides a model and an interpretation that is complementary to ours, arguing that what matters is not the number of parties in government, but the ability to commit to policy packages that compensate across different dimensions. He also identifies the likelihood of being excluded in the future as one of the concerns that might lead to reforms being blocked.

Lindvall stresses the point that the case of pension reforms in Europe in the 1990s and 2000s is particularly relevant to the problem of reform capacity ‘since there is broad agreement that pre-reform pension systems in Europe were unsustainable’ (2010: 360). This observation, which also applies to broad market-oriented reforms in former communist countries, might be one of the conditions of applicability that separates our analysis from many exercises in the veto player tradition. While Tsebelis has been adamant not to pass welfare judgments on the desirability of different policy changes,¹⁹ the ‘reform’ literatures tend to focus on comparisons where there are some policies that are deemed necessary by most observers. While in the models above we have assumed that the true state of nature Θ, and hence the desirability of various policies, is perfectly observable and common knowledge, things tend to be more complicated in the real world. If Θ is not perfectly observed, one cannot empirically separate changes that respond to Θ from other changes, and hence cannot tell adaptability from stability apart. It seems implicit in some of the literature just mentioned (and explicit in Lindvall (2010) and in Gehlbach and Malesky (2010) that market-oriented and welfare-retrenchment reforms are cases of Θ fairly known, so that we might expect intertemporal considerations to have more bite there.²⁰

Other conditions of applicability of static versus intertemporal veto player theories have to do with the characteristics of policies and the context in which they are implemented. While we do not develop this at length here, and it would be desirable to further develop it both theoretically and empirically, we might speculate on which types of policies or of situations make less myopic (more forward-looking) behavior more likely. Different policies may have different intertemporal characteristics that lead themselves more or less naturally to intertemporal bargaining (once and for all policies with immediate effects, once and for all policies with long-term effects, recurrent policies). In terms of specific situations, one might wonder whether moments of crisis will lead actors to play more or less intertemporally. On the one hand, crises tend to shorten horizons, making actors more myopic; but on the other, crises seem to be situations in which it is easier to agree on the need for policy reforms.²¹ One thing to notice is that often crises themselves are (in a cross-sectional sense) endogenous to characteristics of the countries’ policymaking environments. Some countries might adapt better than others in general, so that when faced with an external shock, they might not need substantial reforms. It might then be the case that in the face of an external crisis, the countries that change their policies more abruptly are those stuck in very rigid policies (e.g a currency board), and not those that have been adapting all along (e.g floating exchange rates).

Beyond the discussion on the applicability of static or dynamic veto player logic to specific policies and situations, we want to argue that the type of intertemporal analysis of the effects of institutional configurations we peddle here does require an empirical approach that is different from the ones that have dominated the rich empirical literature on veto players. We believe that in order to evaluate the relationship between adaptability and stability it is necessary to look at the behavior of a vector of policies instead of a specific realization of policies, and that for studying their relationship with the number of veto players it is necessary to capture permanent institutional characteristics as opposed to specific configurations at a moment in time.

The veto player logic has been applied to a large number of different issues in a number of different contexts, often finding evidence in favor of assertion A2. A large chunk of these studies has tended to focus on specific episodes: whether one particular reform or reform package took place or not (or to what extent), in one particular time window, under a particular configuration of preferences and status quo, over one particular policy domain. Valuable as those studies are to understand those particular cases, as well as to verify other predictions of veto player theory (such as those on preference distances), they are not direct evidence to study the effects of a time invariant institutional structure on some intertemporal characteristics of policies, such as adaptability or stability. Stability and adaptability are inherently intertemporal characteristics, not very amenable to observation in an episodic manner. Furthermore, these characteristics cannot be evaluated by looking at changes of policies or legislative activity at one moment in time—even if the estimations are done using panel data. Such exercises do not allow differentiating between policy changes that are determined by changes in underlying economic conditions from other reasons. If policy changes do happen, is that because they are reflecting the ability of the polity to modify policies when they are failing (adaptability), or because they are reflecting changes in the configuration of the actors in government (lack of stability)? Therefore, looking at one specific instance does not tell much about the ability of the country to adapt its policies in the long run. Hence, to evaluate the effects of an institutional structure (such as a veto player configuration) on policy characteristics such as stability or adaptability, it is necessary to look not only at one specific realization of a policy, but also at the behavior of a vector of policies over time, and attempting as far as possible to identify whether changes respond adequately to underlying circumstances.²²

Given that we suggest looking at broad sets of policies over longer spells of time, and because we believe that veto players care not only about who else is sitting at the negotiation table today but also about who will be there tomorrow, the independent variables capturing veto player structures should be such that they capture permanent institutional characteristics, as opposed to specific configurations of effective veto players around a specific status quo on a particular policy issue. In our view, the ‘counting’ of veto players should include both the current as well as the potential future configurations of players.²³ Some of these considerations are already present in the extant applied veto player literature, and measures that attempt to capture more permanent features for broad cross-national analysis have been developed. We have used some of the most common proxies for the number of veto players in some preliminary exercises that we now summarize.

As a rough approximation to the type of empirical exercise that might assess the applicability of assertions A1 and A2 for broad comparative analysis, we have drawn from existing international datasets variables (largely of opinion survey nature) that might serve as proxies for the notions of stability and adaptability as understood in this paper and (implicitly or explicitly) in the broader literature.²⁴ As proxies for policy stability we have used variables capturing the volatility of economic policy (inverse), the arbitrariness and costliness of policy changes (inverse), and the tendency of new governments to respect the commitments of previous governments. As proxies for policy adaptability we used variables capturing the ability of political leadership to act flexibly, whether political leaders can replace failing measures with innovative policies, and the decision-making capacity in economic matters.²⁵ Controlling for factors such as gross domestic product (GDP) per capita and regional and legal origin dummies, we have looked at the correlations between four measures of stability and three measures of adaptability, and none of them is negative (in fact all of the correlations are positive, with half of them being statistically significant).²⁶ Clearly, common belief A1 does not receive confirmation in such exercise.

We have also verified whether polities with more veto players have less adaptable policies (assertion A2), using as a dependent variable the proxies for adaptability mentioned above. As independent variables, in connection with the prior discussion, we use some of the variables most commonly used for broad international comparisons of the number of veto players. These proxies are Executive Constraints from the Polity IV project, POLCONV from the dataset developed by Witold Henisz, and Checks from the Database of Political Institutions (Beck et al., 2001). We regressed the three adaptability measures on each of these measures of the number of veto players, controlling for GDP per capita, region, and legal origin. Contrary to the expectations of assertion A2, we are unable to find a negative and significant coefficient with any of the different measures. Figure 2 shows a scatterplot of the residuals of the regression of a combined measure of adaptability on the POLCONV measure of the number of veto players.

The use of subjective measures was motivated by the lack of comprehensive objective measures of such properties, especially for large cross-sections of countries. Ideally one would like to have similar variables built from objective data. Given its centrality as an indicator of policymaking, fiscal policy is a natural candidate. A recent paper by Fatás and Mihov (2013) provides a good example of an attempt to look at an intertemporal property of fiscal policy that comes quite close to the inverse of our notion of stability. They look at the volatility of public consumption over a long period of time, attempting ‘to isolate a measure of policy stance that captures the portion of discretionary policy that is not explained by the state of the business cycle’ (2011: 5). They find that countries with more veto players have more stable fiscal policy. The virtue of that particular exercise from our point of view is that it takes a long horizon measure of volatility (40 years) and that it makes a serious attempt at discriminating between changes that were occurring as adjustments to the economic cycle and changes that occurred because of ‘changes in the political preferences of the ruling party or because of the desire of the incumbents to generate a temporary boom before elections’ (2011: 5).

In a preliminary effort we have attempted to follow the lead of Fatás and Mihov (2011) in an application to a good proxy for adaptability: (the inverse of) the procyclicality of fiscal policy. Procyclicality is considered by macroeconomists and fiscal specialists as a good measure of the government inability to adequately respond to economic conditions through the business cycle. Using the 43-year measure of procyclicality from Kaminsky et al. (2004), we found evidence against A1 (procyclicality is positively correlated with fiscal volatility) and against A2 (we never find a positive and significant coefficient for the number of veto players—for any of the three measures mentioned above—using procyclicality as the dependent variable).²⁸

Even though these results cannot be interpreted as testing the models presented before (which are meant as examples and not as general propositions), together with prior results contradicting veto player predictions, they cast some empirical doubts on the theoretical generality of assertions A1 and A2.

6. Conclusion

Veto player theory is a very influential approach in comparative politics, which has been fruitfully applied to a number of policy domains, in particular with regards to policy reforms. This paper joins some recent contributions (Gehlbach and Malesky, 2010, and Lindvall, 2009, 2010) that purport to extend veto player theory in dimensions that would permit a richer understanding of the effects of political institutions on policy outcomes. In particular, it argues that when modeling in explicitly intertemporal contexts, it is not necessarily true that polities with more stable and credible policies have more difficulty in adjusting policies to new circumstances, nor that polities with more veto players have more difficulty in adjusting policies to new circumstances. We also discussed some empirical results from previous studies, as well as some tentative empirical analysis along the logic presented here. This suggests that our theoretical concerns seem to have some empirical grounding.

We believe there are various natural tasks ahead in thinking further in terms of an intertemporal approach to policymaking, in the context of veto player logic, and in other contexts. The intertemporal logic presented here is twofold: (i) institutional rules affect not only who is in power today but also the chances of each actor being in power again in the future; (ii) the effects of institutional rules operate also through the incorporation of that future in the current strategic reasoning of players. This logic travels beyond the discussion of veto players (unanimity rule). If those sitting at the table were to choose by mechanisms other than unanimity, say by majority, the reasoning will still apply. This logic, then, can be applied more generally to study the policy effects of particular configurations of political institutions, distributions of preferences, and intertemporal patterns of allocation of power.²⁷

According to the account of this paper, intertemporal cooperation among political actors is a mechanism through which good outcomes are achieved. Among other things, it provides a mechanism to address time inconsistency problems. In the context of our first model, having more veto players is one institutional solution to the problem of creating a credible commitment in the first period about behavior in the second. However, these points are valid (in the sense of inducing general welfare improvements) only insofar as the political actors of our game are adequate representatives of key socioeconomic groups and of the population at large. Our intertemporal models here, as well as most veto player literature, are silent about who these players actually are vis-á-vis the whole polity. By taking as given the set of political players and their preferences, we have implicitly brushed away important issues of representation. More collusion (intertemporal cooperation) among the players of this game will not necessarily be welfare improving for the population at large if these players are scarcely representative.²⁸

Also, in terms of political agency, the players of our model are best thought of as perfect agents (say, parties) of underlying economic constituencies. Various rules of the political game will have an effect not only on the mode of interaction among those representatives (as stressed in the veto player literature and in this paper), but also on the degree to which these actors tend to do what is best for their constituents instead of engaging in rent extraction and other distortions. Further modeling of cooperation among policymakers in the context of representative democracy constitutes an important next step.³⁰

As we have mentioned before, this paper’s objective was to show some examples that would cast doubts about the generality of the extant veto player approach in certain contexts. As such, in addition to the potential theoretical extensions discussed above, this paper may provide the grounds for further empirical work and maybe for the reinterpretation of some existing results: it may provide the basis for work that differentiates between types of reforms; and it may provide new hypotheses regarding what to expect under different bargaining contexts (the degree to which policies are intertemporal). Hopefully, other researchers will take this research and carry it forward in a way that further strengthens veto player theory and the understanding of policymaking processes.

Footnotes

Acknowledgements

We received helpful comments from Alberto Cavallo, Gary Cox, Alberto Díaz-Cayeros, Lucy Goodhart, Steph Haggard, Mark Hallerberg, John Huber, Phil Keefer, Marcelo Leiras, Johannes Lindvall, Fabiana Machado, Beatriz Magaloni, Isabella Mares, John Morgan, Pablo Pinto, Jim Snyder, Kaare Strom, Barry Weingast, Federico Weinschelbaum and seminar participants at ALACIP, University of California at Berkeley, Columbia University, University of Edinburgh, Inter-American Development Bank, LACEA Political Economy Group, MIT, MPSA, Public Choice Society Meeting, Stanford University, UCSD, and Universidad de San Andrés. We also thank the editor and two anonymous referees for comments and suggestions that lead to improvements in the paper. We are grateful for the valuable research assistance from Laura Trucco, Melisa Ioranni, Diego Focanti, and Maria Franco Chuaire. The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent.

Notes

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