1. No one knows what the balance of power will be come 1/1/13. If they both did, then the side which has the future disadvantage would be trying to extract that future value adjusted up by the value of cooperation. Obama’s offer can be seen as this except it seems likely the GOP side would accord little value to Democratic cooperation if the Democrats are the future weaker side. This would show up in the debt ceiling offer: why would the GOP agree to this if they see the Democrats as weaker in a month? Maybe the move to $400k from $250k is the cooperation premium, but if so that means the Democrats expect a good deal in the future.

2. One side knows what the balance of power will be come 1/1/13. Boehner’s plan can be seen as such a statement: take this because we can get this in the future. Classic negotiating tactic. It can also be seen as #1 above: they don’t know so they’re posturing. By bluffing, they hope to signal future strength.

This is pretty much all there is to it. If both sides know, then we can say they have some internal incentives that make delay attractive. Like the GOP House members don’t want to vote to raise taxes but would vote to lower them. Simple delay is not a particularly interesting case; it just means we wait a few weeks. I can see this as a possibility because the incentives align for waiting.

But if neither side knows, we could be in for a really interesting mess. And if one side knows, then we could as well because that means the other side will need to realize the strength of its position over time and that could be really ugly.

In other words, think of this as a standard game exercise. You have a material event coming. The question, which is no different than any other game analysis, is whether you make a deal before the event or after. You can think of it as a 2 round game: you have a chance to make a deal before and a chance to make a deal after. It’s like the prisoner game if you set it up so there’s a second round of bargaining. Are you better off making the deal now or later?

The wild card is that Obama is President but is negotiating for his party. We don’t have exactly equal sides because the President has a special role in society that rises above party. That is, this role exists if Obama believes it exists and if he’s acting that way. That means Obama may be underplaying his future strength because as President he feels making a deal is more important than extracting the party value. I can’t value that possibility but it’s there.