Fiscal Negotiation Games

Until recently, the fiscal cliff negotiations were at the forefront of politics in America for three months – from October to the beginning of January. For those unfamiliar with the “Fiscal Cliff,” an article (that motivated this post) describes the fiscal cliff succinctly and accurately as follows: it refers to a set of “laws include tax increases due to the expiration of the Bush tax cuts, as well as spending cuts under the Budget Control Act of 2011.” After reading and listening to politicians and pundits on both the left and right discuss the implications of the cliff and the gameplay involved in the tactics utilized by both sides, it appears that it is essentially, a game.

If this Fiscal-Cliff Game were to be constructed using a payoff matrix, the Democrats and Republicans would be the players. While there are various elements of the negotiations that could be considered in the matrix, it is possible to focus on two primary strategies: (1) to let the Bush-era tax cuts expire on incomes over $200,000 or (2) agree to preserve the tax cuts for everybody – decisions that would favor the Democrats or Republicans respectively. For each possible outcome, a political payoff for each party can be calculated to reflect more desirable political outcomes versus those that are less preferable in a relative sense. In every game, each player would like to maximize their payoff. With the partisan division and individual party incentives in mind, this means that there is no incentive to compromise. However, two forces changed the dynamics – or payoffs – of the games. First, as a result of nationwide campaigning and extensive marketing by SuperPacs during the Presidential primary, the political foundation of Washington had been quite sensitive; that is, it was strongly influenced by public opinion. Because nationwide insights were in favor of the Democratic Party’s position, we can see that, in the context of the Fiscal-Cliff Game, public opinion would not minimally influence Democrats to compromise on the expiring tax cuts for incomes over $200,000 and especially those over $1,000,000. The second force that altered the dynamics came when the Democratic Party won the Presidential election. With both polling and a major political win on their side, there was no possible motivation or justification for the Democratic Party to concede in the negotiations. At this point – the author points this out as well – the Democrats were in a very good bargaining position.

What took place after the election was probably no surprise to game theorists. While Republicans understood that the Democrats had the advantage and would eventually have to concede, both sides continued negotiations, public blame games and refusing to make proposals that involved realistic compromises. Essentially, proposing the optimal approach too soon could weaken their position. From a game-theoretic point on view, it seemed appropriate to postulate that neither side would change both their original strategies and their current strategy of delaying serious talks – and they did not. It was, indeed, Nash equilibrium: each player understood its opponents strategies, leading them to neither give up or change their own approach.

In hindsight, it may be possible that Republicans, specifically, believed that the Democrats could possibly alter their strategy because of other factors, such as the loquacious “uncertainty” that loomed over consumers and the economy and the massive impact that a move over the fiscal cliff could have on the entire economy. Additionally, Republicans perhaps calculated the prospective political value of waiting until the very last minute of the negotiations; e.g., maybe it was a ploy to exhibit to their voters how hard they fought and defended their ideals. Whatever the case, a deal was finalized; and it will be interesting to discover how the upcoming negotiations on the automatic spending cuts, known as the sequester, will be played. Given the level of uncertainty about a range of other political issues, it would not be startling to discover that a significant portion of solutions strategies formulated by both parties are created in the context of a game, as well.


Gavin R. Grant
Temple University

Works Cited: