Political Brinkmanship and Compromise

We study how do-or-die threats ending negotiations affect gridlock and welfare when two opposing parties bargain. Failure to agree on a deal in any period implies a status-quo disagreement payoff and a continuation of the negotiation. However, under brinkmanship, agreement failure in any period may precipitate a crisis with a small chance, i.e. an outcome worse than the status-quo and any possible deal. In equilibrium, such brinkmanship threats improve gridlock, i.e. the scope of agreement, but also increase the risk of crisis. Brinkmanship reduces welfare when one might think it is most needed: severe gridlock. In this case, despite this global welfare loss, a party has incentives to use brinkmanship strategically to obtain a favorable bargaining position.