Sunday, December 9, 2012

Bargaining: President vs. Congress

Robert Frank (game theorist) has a column in the NY Times applying John Nash's non-strategic (Chapter 16) or axiomatic theory of bargaining to the standoff between Congress and the President. He correctly notes that it is the alternatives to agreement that determine the terms of agreement, and tells a funny story of Warner Brothers bargaining with Tony Bennett to sing the closing song in their hit comedy, "Analyze This."
With the film almost completed — and with Mr. Bennett already an integral part of the plot — the studio finally got around to approaching the crooner with an offer of $15,000 to sing “I’ve Got the World on a String” in the movie’s closing scene. But as Danny Bennett, the singer’s son and business manager, later explained, the executives made a fatal mistake by not scheduling this conversation sooner: “Hey, they shot the whole film around Tony being the end gag and they’re offering me $15,000?”

It would have cost the studio a lot more than $15,000 to rewrite the script and get someone else to do it (the alternative to reaching agreement), which gave Mr. Bennett a lot of bargaining power.  The studio eventually paid him $200,000.

The rest of Professor Frank's analysis depends on his assumption that going over the fiscal cliff would hurt Republicans more than Democrats. If he is right, then his prediction is that the Republicans will cave on the issue of tax rates, will likely come true.

But lower tax rates is the one theme that has united Republicans, at least since the Presidency of Reagan, so I am not sure they can give this up without severe damage to the party. If so, this alternative may be even worse for Republicans which would predict that they would hold fast to their insistence on closing tax loop holes (making for a "flatter" more efficient tax), rather than raising rates.

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