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We propose a new model of legislative bargaining in which coalitions have different values, reflecting the fact that the policies they can pursue are constrained by the identity of the coalition members. In the model, a formateur picks a coalition and negotiates for the allocation of the surplus it is expected to generate. The formateur is free to change coalitions to seek better deals with other coalitions, but she may lose her status if bargaining breaks down, in which case a new formateur is chosen. We show that as the delay between offers goes to zero, the equilibrium allocation converges to a generalized version of a Nash Bargaining Solution in which —in contrast to the standard solution— the coalition is endogenous and determined by the relative coalitional values. A form of the hold-up problem specific to these bargaining games may lead to significant inefficiencies in the selection of the equilibrium coalition. We use the equilibrium characterization of the distortions to study the role of the head of state in avoiding (or containing) distortions. We also show that the model helps rationalizing well known empirical facts that are in conflict with the predictions of standard non-cooperative models of bargaining: the absence of significant (or even positive) premia in ministerial allocations for formateurs and their parties; the occurrence of supermajorities; and delays in reaching agreements.

To study how a firm can capitalize on a long-term customer relationship, we characterize the optimal contract between a monopolist and a consumer whose preferences follow a Markov process. The optimal contract is non stationary and has infinite memory, but is described by a simple state variable. Under general conditions, supply converges to the efficient level for any degree of types' persistence and along any history, though convergence is historydependent. In contrast as with constant types, the optimal contract can be renegotiation-proof, even with highly persistent types. These properties provide insights into the optimal ownership structure of the production technology.

Much recent work has studied the behavioral and cognitive implications of dynamic inconsistency in the preferences of a single decision maker. Yet people are typically immersed in social relations, and often seek relief from their self–control problems by intensifying some of these interactions. Such is the case with self–help groups like Alcoholic Anonymous, Narcotics Anonymous and similar single–focus organizations in which agents are said to achieve better personal outcomes by simply sharing their experiences. Conversely, there are cases where group interactions can severely aggravate individual tendencies towards immediate gratification, as in some peer interactions among schoolmates or youths living in the same neighborhood. In this paper we therefore study how observing the actions of others affects individuals' ability to exercise self–control (resist impulses towards short–run gratification). The key difference with the single–agent case is that the informativeness of others' actions is endogenous, and depends on everyone's equilibrium strategies. The model, in which all externalities are purely informational, can give rise to multiple equilibria where agents' levels of self–restraint or self–indulgence are mutually reinforcing. More generally, we identify conditions on agents' initial self–confidence, confidence in others, and correlation between types (difficulty of the self–control problem) that uniquely lead to either a "good news" equilibrium where group membership improves self–discipline, a "bad news equilibrium" where it damages it, or to both. We also perform a welfare analysis to determine when –and for whom– group membership is preferable to, or worse than, staying alone. The model thus provides a formal theory of endogenous, psychologically–based peer effects or role models, as well as of the importance of group morale.