Embracing the Enemy

TL;DR

This paper models a dynamic game where a principal manages two competing agents, initially excluding but eventually embracing the enemy to achieve policy moderation and influence the friend, revealing strategic trade-offs in power and policy alignment.

Contribution

It introduces a novel strategic framework for understanding how a principal optimally interacts with adversarial agents over time to shape policy outcomes.

Findings

Principal's initial exclusion of the enemy is optimal.

Embracing the enemy leads to policy moderation.

Strong commitment allows more embracing when the friend is close.

Abstract

Two agents repeatedly compete for the power to set policy. A principal partially influences the power allocation. All three players may disagree on policy, but one agent (the ``friend'') aligns more closely with the principal than the other (the ``enemy''). The principal's optimal contract aims to exclude the enemy initially. However, once the enemy gains power, the principal embraces him, trading power for policy moderation. Moreover, the principal leverages the enemy's moderation to move the friend's policies toward her bliss point. If her commitment is strong enough, a principal offers more embrace to the enemy when her friend is close.