Bargaining over reform

This paper models the delay in a macroeconomic stabilization as the outcome of a bargaining game between two parties who must reach an agreement over how the stabilization cost is to be shared. The paper modifies Alesina and Drazen's (1991, American Economic Review 81, 1170-1189) war of attrition mo del by endogenizing the distribution of the stabilization costs through a b argaining game. Using this bargaining framework, the paper analyzes the rol e of crises and foreign assistance in bringing about a settlement to the di stributional conflict. In the bargaining game, a crisis that increases the welfare loss from not stabilizing the economy will lower the probability of delay. In contrast, foreign aid that is used to reduce the stabilization c osts will further increase the delay in reaching an agreement between the t wo parties. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classif ication: H6; D7.