Embracing the Enemy

Abstract

A principal can partially influence the allocation of power between two competing parties. The principal is closer to one party, the ``friend'', than to the other, the ``enemy''. The principal's optimal contract initially seeks to exclude the enemy. However, once the enemy gains power, the principal embraces him in exchange for policy moderation. Moderation also disciplines the friend, inducing him to move closer to the principal's preferred policy. Principals close to the friend fully embrace the enemy; more centrist principals divide their support. Commitment benefits the principal only if she is close to the friend and parties value power little.