Curbing Power or Progress? Governing with an Opposition Veto

Veto institutions are often dominated by government opponents with rival electoral and policy interests (e.g. \divided government"). I investigate the tradeoff between policy control and policy blockade when both the government and the veto party may cater to opposing special interests. The value of an opposition veto depends on whether electoral accountability can discipline bad type politicians. When this is not the case, a veto is beneficial only if the government's special interests are expected to be harmful. In contrast, when bad types care about (re-)election, a veto always increases expected welfare, providing a new rationale for the frequent occurrence of "divided government". Without policy rivalry, an opposition veto fares even better.