Back to Tinbergen and Theil: A Model of Conflict Resolution for Policy Games

In this paper, we develop a model of conflict resolution when two policymakers are in conflict over fixed targets. Using a standard policy game model, we study a solution that relies on cooperative bargaining between policymakers. This bargaining may include or exclude the ranking of targets for each policymaker. Whereas the former solution depends on both policymakers’ preferences and their bargaining powers, the latter solution does not depend on policymakers’ preferences but only on their bargaining powers. We apply our methods of conflict resolution in a Barro-Gordon model with one policymaker (the Government) or two policymakers (the Central Bank and Union) that interact in a centralized and decentralized framework.