Bargaining and informal interactions in the national budget: a game theory analysis of the Israeli case

Abstract

This article suggests a game theory analysis of the interaction between Israeli politicians and bureaucrats regarding the national budget process since the 1980s. During the 1970s and 1980s new structural conditions created new formal and informal rules that weakened Israeli politicians’ bargaining position vis-à-vis the Ministry of Finance (MOF). The 1985 Israeli Economic Stabilization Plan not only changed the formal political institutions, but also created new informal institutions. Under the new circumstances, Israeli politicians can rarely challenge the MOF in the political bargaining process. Given that the MOF officials are aware of Israel’s internal processes and public opinion, attempts by Israeli politicians to create the impression that they are willing to challenge the MOF officials are unlikely. We demonstrate that this situation may ultimately lead to a sub-optimal equilibrium for Israel’s social welfare because the balance of power between the players favors one dominant side – the MOF officials.

Points for practitioners

This article provides insights into how institutional change and various formal and informal political strategies are played out in budgetary decision-making. When structural conditions create new formal and informal rules that weaken politicians’ bargaining position vis-à-vis the Ministry of Finance, politicians may find it very hard to challenge the Ministry of Finance officials. The results may include the creation of a significant gap between public opinion and the socioeconomic policy in practice. The key for preventing such scenarios is making sure, via strong institutions, that the balance of power between the players will not favor one dominant side.