Embracing the Enemy

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.