ECONOMY

174 coalition government
in parliament. This assumption is justified by the observation that in parliamentary
democracies ministries, not independent agencies, implement government policies.
Any policy bargain that involves parties without a seat at the cabinet table therefore
would lack credibility. 29 The inability to bargain credibly over policy with parties
outside the cabinet is a key feature of the model that is then used to study minority
cabinets and cabinet stability. Governments also have control over perks (e.g. seats
on public boards) that can be distributed to any party in the legislature. These are the
keys to maintaining support for a minority government.
The first important result in the Diermeier-Merlo model is that both minority and
super-majority cabinets can occur as equilibrium phenomena. Moreover, minority
and surplus coalitions are not rare exceptions, but may form for all parameter values.
The traditional literature had viewed minority and surplus governments as an exception
that needed to be explained (e.g. Strom 1990). The Diermeier–Merlo model,
however, suggests exactly the opposite: in a single-period model, minimal winning
coalitions would never form. The underlying reason is that formateurs can choose
from many viable coalition governments. They will thus choose the government that
yields the highest payoff. In the case of risk-averse preferences this implies that if the
formateur party ever benefits from policy compromise, it is even better to include
all other parties into the bargain rather than just one. This case corresponds to a
super-majority government. If policy compromise is too expensive for the formateur,
a minority government results.
So, why do we observe minimal winning coalitions? 30 Surprisingly, minimal winning
coalitions only occur because of dynamic considerations. The key insight relies
on the importance of bargaining inefficiency for cabinet termination. Diermeier and
Merlo show that as long as bargaining is efficient, governing parties will have an
incentive to reshuffle distributive benefits in response to external shocks rather than
taking the risk of being left out of the ensuing new government. If efficient bargaining
is not possible, however, as in the case of bargaining between the minority government
and the parties in its supporting coalition, governments may fall. It follows that
during initial cabinet formation formateurs need to anticipate the possible costs of
early termination and reshuffles. Diermeier and Merlo show that for some parameter
values minimal winning cabinets are the best deal. On the one hand, they avoid early
termination; on the other hand, renegotiations occur only with one party, not with
two. For other parameter values surplus or minority coalitions are optimal. So all
observed cabinet types can be recovered as equilibrium phenomena.
One important consequence of the Diermeier and Merlo framework is that formateurs
anticipate the benefits and costs from maintaining a given cabinet over time.
Both costs and benefits depend on the cabinet type. So, depending on the parameters,
formateurs will choose different cabinet types, including some minority cabinets that
are likely to terminate early. The stability and the relative occurrence of different types
of governments are thus jointly determined in equilibrium. As we will see in the next
²⁹ A similar argument was made by Laver and Shepsle 1990.
³⁰ They make up about half of all observed coalitions.