ECONOMY

170 coalition government
Compared to the Laver–Shepsle model, the Baron–Ferejohn model has many
methodological advantages. Because of the use of non-cooperative game theory,
equilibrium existence is assured even in environments (e.g. dividing a fixed benefit
under majority rule) where the core is empty. 16
These features make the model very suitable for institutional analysis.
However, compared to the Laver–Shepsle model, the Baron–Ferejohn model is
much more difficult to work with, especially if one leaves the purely distributive
(“divide-the-dollar”) environment and includes policy preferences. In that case only
the simplest environment of three symmetric parties with Euclidean preferences is
reasonably manageable. 17 Also, the model is only about coalition formation, not
stability.
Therefore, even though the Baron–Ferejohn model does not have the same
methodological challenges as the Laver–Shepsle model, its applicability in the study of
coalition government is constrained by its technical difficulties. These shortcomings
have limited its use in explaining, for instance, minority government formation or
cabinet stability. 18
5 Alternative Frameworks:
Demand Bargaining and
Efficient Negotiations
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The methodological shortcomings of the Laver–Shepsle framework and the technical
challenges of using the Baron–Ferejohn model in an environment with policy
preferences have led to a search for alternative bargaining models over coalition
governments. Two candidates have received the most interest: demand bargaining
and efficient negotiations.
voting and proposal rules (Baron 1989), parties with spatial preferences (Baron 1993), and multistage
decision-making (Baron 1996). See Baron 1993 for a detailed overview.
¹⁶ The curious reader may ask why the Baron–Ferejohn model does not face the same
methodological issues as the Laver–Shepsle model. Suppose parties would vote over selection
probabilities. Don’t we face similar non-existence problems as discussed in the Laver–Shepsle model?
Such a question confuses two different methodologies. Laver and Shepsle use the core as their solution
concept. If we use the core, non-existence problems reappear at the level of institutional choice. But if
we use Nash equilibrium, then the collective choice over selection probabilities again needs to be
modeled as a non-cooperative game and this game generally will have a Nash equilibrium. For a more
detailed discussion of this subtle point see Diermeier 1997; Diermeier and Krehbiel 2003. For a model of
voting over proposal rights see Diermeier and Vlaicu 2005.
¹⁷ See Austen-Smith and Banks 2005 and Banks and Duggan 2000, 2003, for a thorough analysis of
the Baron–Ferejohn model. In the general case of convex preferences we also have to worry about
multiple equilibria. See also Eraslan and Merlo 2002.
¹⁸ See, however, Baron 1998 who proposed a model based on Diermeier and Feddersen 1998 where
minority governments could be stable, but would not be chosen in equilibrium. See also Kalandrakis
2004.