Dynamic Collective Choice with Endogenous Status Quo

Abstract

This paper analyzes an ongoing bargaining situation in which preferences evolve over time and the previous agreement becomes the next status quo, determining the payoffs until a new agreement is reached. We show that the endogeneity of the status quo induces perverse incentives that exacerbate the players' conflict of interest: Players disagree more often than they would if the status quo was exogenous. This leads to inefficiencies and status quo inertia. Under certain conditions, the endogenous status quo leads the negotiations to a complete gridlock in which players never reach an agreement. Such gridlock can occur between players with arbitrarily similar preferences, provided they are sufficiently patient. When applied to the legislative setting, our model predicts polarized behavior, and explains why oftentimes legislators fail to react in a timely fashion to economic shocks.