Appeasement and compromise under a referendum threat

Standard legislative bargaining models assume that an agreed-upon allocation is final, whereas in practice there exist mechanisms for challenging passed legislation when there is lack of sufficient consensus. Such mechanisms include popular vote requirements following insufficient majorities in the legislature. This paper analyzes a one-period legislative bargaining game whose outcome can be challenged through a referendum. I study the effects of this institution on the bills passed in the legislature and analyze the incentives it provides for reaching legislative deals. The proposer party’s trade-off between a larger winning prize and a more threatening opponent in the referendum summarizes the bargaining problem. The results indicate that measures of post-bargaining power do not necessarily translate into higher equilibrium payoffs and that the equilibrium bill may include no concessions from the majority to the minority party. Moreover, caps on campaign spending may incentivize a costly referendum over unanimity in the legislature. These results carry policy implications for regulating various forms of post-bargaining power, such as campaign finance laws for referenda.