A model of coalition formation: Theory and evidence

Coalition formation is modeled as a cooperative game. Each party enters the game endowed with a proportion (weight) of votes that it obtained in the election, and a preferred policy position. The payoffs to any party that joins a coalition are a function of the distance between the party's and the government's respective policy positions, and the office related payoff that the party receives as a member of the coalition. A new core solution concept, the IVCORE, is introduced. It allows the analysis of the trade-off between ideological, policy payoffs, and office-related sidepayments, in the bargaining process over future coalitions. It turns out that policy concerns of parties "induce" a core in a typical transferable payoffs game that would, otherwise, have a generically empty core. At the same time, the "budget constraint" on the office-related sidepayments, determines the composition of the coalition. The process of coalition formation in Israel, after the 1992 election, is used to illustrate the empirical relevance of the theoretical model.