Coalition preclusion contracts and moderate policies

We examine the effects of a novel political institution called Coalition Preclusion Contracts (CPCs) on the functioning of parliamentary democracies with proportional representation. CPCs enable political parties to credibly exclude one or several parties from the range of government coalitions they are prepared to envisage after elections. We consider a simple political game with a two-dimensional policy space in which three parties compete to form the government. We find that CPCs with a one-party exclusion rule defend the interests of the majority by precluding coalition governments that would include so-called extreme parties. This translates into moderation of the policies implemented and yields welfare gains for a large set of parameter values. We discuss the robustness of the results in more general settings and study how party-exclusion rules have to be adjusted when more than three parties compete in an election.