Andrei Shleifer and Robert W. Vishny. 1993. Corruption

Andrei Shleifer and Robert W. Vishny. 1993. "Corruption." Quarterly Journal of Economics 108 (3): 599-617.

• Corruption
• Corruption is the sale by government officials of government property for personal gain.
• Corruption without theft occurs when the government sets a price p for a good, such as a license, but the the official charges a price greater than p, turns over the official price to the government and keeps the excess.
• Corruption with theft occurs when the official makes a sale for the good at any price and doesn't turn p over to the government.

• Market forces at work
• Profit maximizing incentives of government officials: those who would pay most to be an official get to be an official + those who can pay the most are those that can collect the most bribes = maximal bribes collected 
• Buyers want to be more competitive in the market. When there is corruption without theft, buyers can reduce the cost of goods that officials sell through bribery.
• Role of agency organization
• If there is just one agency selling different complementary goods, a joint monopolist, then it can strategize so that the low price of one good spurs the demand for a complementary good. The agency extracts greater rents this way. 
• When different agencies with different jurisdictions operate independently when selling complementary goods, each agency will sell its respective good at the monopoly price. The cost becomes exorbitant for the buyer who must buy all complementary goods in order to operate and fewer goods will be purchased in comparison to when there is a joint monopolist. 
• When agencies have overlapping jurisdictions (redundancy), then there is competition and there will be minimal to no corruption because buyers can just find the agency that charges the lowest price. 
• The role of secrecy in corruption
• Agency efforts to avoid detection of its corruption and subsequent punishment causes corruption to be more distortionary than taxation. Government officials will use their power to induce substitution into the goods on which bribes can be more easily collected without detection, such as banning certain imports.
• The menu of goods in available in a country is determined by corruption opportunities rather than tastes or technological needs.
• A cap is put on the number of people who are involved in giving and receiving bribes in order to maintain secrecy, which contributes to a hostility to newcomers, which inhibits change and innovation. Economic growth suffers as a result.

Roger G. Noll. 1989. Economic Perspectives on the Politics of Regulation

Roger G. Noll. "Economics Perspectives on the Politics of Regulation," In R.D. Willig and R. Schmalensee, eds. Handbook of Industrial Organization, Vol. 2, North-Holland (1989): 1254-1287.

This chapter surveys the research on the political causes of regulatory policy.

Public interest theory - the view that, as a matter of positive theory, the normative goal of curing market failures animates the choice of regulatory policies.

• Assumptions:
1. Regulation is adopted only in the presence of genuine market failure
2. At the time, regulation is the best available policy instrument
3. Regulation does not persist once it begins to impose costs greater than the efficiency gained.
• How regulation can act to the benefit of the public:
1. Government regulation corrects market failures. 
2. Information pertinent to identifying market failures is most cheaply acquired and disseminated by government. 
3. Governments may be able to correct market failures with lower transaction costs than direct negotiation between producers and sufferers. 

Agency relationships mediate the relationship between the policy preferences of citizens and the policy outcomes pursued by agencies.

• The degree to which agents comply with the preferences of principals depends on: 
1. The extent to which principals and agents have conflicts of interest
2. Tthe costs and accuracy of methods for principals to monitor the performance of agents
3. The power of the principals; enforcement mechanisms for redirecting the incentives of the agent. 
• If a single interest group is effectively organized, the result is Stigler's simple "capture"—the one organized group will tend to be monopoly or cartel that is protected by regulators. 
• Theoretically, regulation will depart from efficiency only when it is necessary to create and divide rents among represented interest. Departure of regulation from efficiency is constrained by:
1. Political entrepreneurs who can effectively pay the organization costs of an unrepresented group.
2. Technological change and rising incomes that can cause previously unrepresented interests to eventually have sufficient stakes in a particular domain of regulation to become represented in it.
• Difficulties in controlling the behavior of regulatory agencies: 
1. Agencies can engage in shirking
2. Agency officials may have their own political agenda 
3. Agency personnel may b motivated by personal career objectives 
4. Agencies may be populated by professionals who have a narrow or uninformed perception of how to achieve public interest objectives.

W. Kip Viscusi, John M. Vernon, Joseph E. Harrington, Jr. 2000. Introduction to Economic Regulation

W. Kip Viscusi, John M. Vernon, Joseph E. Harrington, Jr. "Introduction to Economic Regulation," in W. Kip Viscusi, John M. Vernon, and Joseph E. Harrington, Jr. Economics of Regulation and Antitrust, 3rd ed. (Cambridge, MA: MIT Press, 2000), pg. 297-336

Regulation - a state imposed limitation on the discretion that may be exercised by individuals or organizations, which is supported by threat of sanction.

Variables controlled by regulation:

1. Price
• Imposition of a single price
• Specification of a price structure
2. Quantity
• With price regulation
• Without price regulation
3. Number of Firms
• Restrictions on entry and exit
4. Quality
5. Firm investment

Theory of Regulation - why is there regulation? / Hypotheses about empirical regularities 

1. Public Interest Theory - also known as normative analysis as a positive theory (NPT) - government regulates to correct market failures.
• Inconsistent with empirical evidence where firms supported or lobbied for regulation and where industries are regulated despite lack of market failure.
2. Capture Theory - the agency that should be regulating the industry is "captured" by it, instead, so regulation promotes industry profits rather than social welfare.
• Does not explain regulation not supported by firms.
• Performs better at explaining the timing of deregulation bank branching restrictions in the banking industry than NPT.
3. Economic Theory of Regulation - interest groups control regulation. 
• Stigler/Peltzman model: legislators balance desires of the interest groups and consumers to determine appropriate action.
1. Regulatory legislation redistributes wealth.
2. The behavior of legislators is driven by their desire to remain in office, so legislation is designed to maximize political support. 
3. Interest groups compete by offering political support in exchange for favorable legislation.
• Becker model: regulation is used to increase the welfare of more influential groups. Those who stand to gain the most and who suffer the least from free rider issues hold the most sway.

Allan Drazen. 2000. Political Economy in Macroeconomics

Allan Drazen. 2000. "The Time-Consistency Problem" and "Laws, Institutions, and Delegated Authority," in Alan Drazen, Political Economy in Macroeconomics (Princeton, NJ: Princeton University Press): 101-165. Chapters 4 and 5.

Chapter 4: This chapter just gives examples of time-inconsistency in policy choices that might arise. They all arise from heterogeneous preferences/conflicts of interests. 

Terms:

1. Time-inconsistency is said to arise if, though nothing has ostensibly changed, the policy chosen for time t+s chosen at time t is different from the policy chosen for time t+s at time t+s. 

I. Introduction

• The puzzle: why does time-inconsistency arise if the fundamental characteristics of the policymaking environment does not appear to have changed?  
• A conflict of interests of some sort is necessary for time inconsistency to arise.
• Time inconsistent policy is interesting when it is chosen to maximized the welfare of those who are misled.

II. A Simple Model of Capital Taxation

• There are two time periods. 
• In the first period:
• The government announces the tax rates it will implement in period two.
• The individual being taxed has an exogenous endowment and chooses consumption level and capital accumulation to be used in the second period
• In the second period:
• The government implements a tax rate on the capital the individual saved in the first period and the labor the individual gives in the second period.
• The individual gets the payoff from government spending and from consumption, which are functions of the capital saved from the first period and the labor the individual supplies in the second period.
• Time-inconsistent solution: the tax policy the government announces for time period 2 while in period 1 is different from the tax policy the government actually implements at time period 2. Occurs whenever ex post capital elasticity is less than the ex ante elasticity.
• In the first period, the government will announce a tax vector with a low rate to encourage capital accumulation.
• In the second period, the government will carry out a tax that is different from the one announced in the first period and there is nothing people can do about it because they can't really change the capital supply anymore.
• Precommitment solution: the tax policy the government would announce in the first period when it has a mechanism to commit to it and not reoptimize in the second period.
• The precommitment solution is the same as the time-consistent solution that results when individuals take government preferences into account when they choose their income allocations and when governments take into account individual preferences into account when they choose their tax policies.

III. Explaining Time-Inconsistency in the Model of Capital Taxation

• People cannot operate for their own good when they are subject to pre-existing constraints or distortions.
• Sequential policymaking is a necessary but not a sufficient condition for the possibility of time consistency to arise. 
• What is essential to the phenomenon of time inconsistency is conflict of interests in the second time period (ex post heterogeneity).
• The dependence of utility on aggregate allocations induces a source of conflict among agents, which is crucial for the possibility of a time-inconsistency problem.

IV. A Basic Model of Monetary Policy

• The policymaker chooses optimal inflation taking expected inflation as given. 
• The conflict of interests which lie behind the possibility of time inconsistency:
• Mirroring the capital tax problem, heterogeneity of interests in a representative agent model results in conflict of interests. Each individual wants to minimize the error of his own forecast of future inflation, but would like everyone else to under-predict inflation so that the economy-wide average prediction implies low unemployment.
• Conflict not in the capital tax example: conflict of interests between policymakers with different objectives, reflecting perhaps a conflict of interests between the different constituencies they represent. Conflict occurs when the natural rate of unemployment that the fiscal authority finds optimal is not the same as the natural rate that the monetary authority finds optimal; the fiscal authority has an incentive to increase economic activity and thus drive up short-term inflation.

V. Equilibrium Solutions for All Models

• Optimum is achieved when the policymaker is led at time t+s to carry out the policy announced at t, rather than some other policy, and it is "common knowledge" that he will indeed carry out the policy.

VI. Commitment vs. Flexibility

• There might be gains to ensuring commitment, but in the real world, unforeseen and unforecastable events occur so that the optimal policy at time t+s cannot always be identified at time t. 
• Escape clauses allow for commitment and flexibility.

Chapter 5: This chapter provides solutions to time-inconsistency problems. This chapter concentrates on how the policymaking environment can make policy credible, that is, how institutions or the creation of external circumstances (broadly defined) can lead to the expectation that announced policies will be carried out.

I. Introduction

• When policymaking is viewed as a sequence of decisions, so that the government can reoptimize at every point, the problem of time consistency can be viewed as reflecting changes in incentives over time. Time t decisions lead to an evolution of state variables which give a policymaker the incentive to deviate at time t+s from his previously optimal policy.
• Example: the decision to impose taxes on capital in a time-inconsistent way reflects the accumulation of capital, an accumulation that was induced by the government's previous policies. Hence, with the policymaker's narrowly defined objective function unchanged over time, time inconsistency may be thought of as due to change in the environment brought about by the policymaker himself.
• Time inconsistency can be avoided if a policymaker at time t can choose policy in such a way that state variables at time t+s imply that it is optimal not to deviate at t+s from the previously optimal policy. 
• One way to make current policy credible is by building a reputation by engendering the expectation that certain policies will be followed in the future on the basis of actions that have been observed in the past. 

II. Laws, Constitutions, and Social Contracts

• There are important differences between promises which have no legal backing and laws (including widely accepted norms) in analyzing solutions to the time inconsistency problem.
1. Laws have penalties attached to them so that there are explicit costs to breaking the law. Similarly, social norms have recognized costs associated with not following them.
2. Explicit laws or widely recognized social norms make noncompliance more visible and hence more costly. 
• Since laws make policies credible only to the extent that the penalties which enforce the laws are themselves credible, enhancing credibility depends on choosing the optimum structure of penalties to do this. 
• Laws (and institutions more generally) can enhance credibility by raising the cost and lowering the benefit from deviating from a given policy. 
• Effective commitment follows from the extreme difficulty in changing a law once it is given constitutional status.
• Constitutions can make policy more credible because it does the following:
• Restrict government's use of authority. 
• Set out the basic processes of policymaking—laws about how collective choices should be made.
• Treat issues that are more fundamental than others, such as basic rights of liberties.
• Provide stringent amendment procedures than other laws.
• Unwritten agreements that have force because they are generally agreed upon go by several names: social contracts, social conventions, social norms.
• Social norm - a pattern of behavior that is customary, expected, and self-enforcing. 

III. Delegation of Authority

• Delegation from a principal (the government) to an agent (the agency/authority) might occur for the following reasons:
•  The agent may have greater expertise and experience regarding a policy area.
• Governments are required to handle a large number of issues, each of which may be extremely complex, making it impossible for a single policymaker to make all decisions. The number and complexity of issues makes delegation essential.
• The principal and agent can sign an incentive contract to eliminate agent bias in policy choices and ensure optimal outcomes. The contract institutionalizes the incentives for compliance; the cost of changing an institutional structure is higher than changing a policy in itself.

IV. Fiscal Structures for Time Consistency

• A government can bequeath to its successor government a specific debt structure, such as setting maturing debt in each period equal to tax revenue net of government spending, to eliminate the incentive for its successor to change tax rates and thus try to reduce its debt obligations. 

Barry R. Weingast and William J. Marshall. 1988. The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets

Barry R. Weingast and William J. Marshall, "The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets," Journal of Political Economy 96, 1 (Feb. 1988): 132-63.

The purpose of this paper is to extend the theory of the firm to the study of political organizations and to explain the pattern of institutions within the legislatures that facilitates decision making.

I. Introduction

• The diversity of interests within the legislature creates gains from exchange.
• Legislative institutions are like market institutions because they reflect:
1. the goals and preferences of individuals (legislators seeking reelection)
2. transaction costs that are induced by imperfect information. 

II. The New Economics of Organization

• Firms emerge to avoid the costs of using markets and the price system; their set of contractual mechanisms substitute for the price mechanism.
• The literature on vertical integration argues that organizational form is largely an endogenous response to ex post contractual problems and ex post opportunism that arise when ex post incentives of the bargaining parties are inconsistent with performing ex ante agreements.

III. Representatives and Their Constituencies

• Perspectives in this paper, that legislative institutions can be analyzed as market institutions/firms, rest on the following assumptions:
1. Congressmen represent the (politically responsive) interests located within their district. Electoral competition induces congressmen, at least in part, to represent the interests of their constituents. Because groups are not uniformly distributed across constituencies, different legislators represent different groups.
2. Parties place no constraints on the behavior of individual representatives.
3. Majority rule is a binding constraint.

IV. The Gains from Exchange: The Problem to Be Solved

• Given the diversity of interests legislators represent, each can bargain and cooperate (vote trade, logroll, etc.) with other legislators in order to benefit their respective constituents.
• The new economics of organization suggests that institutions evolve to enforce cooperation.
  
• Previous work viewed logrolling/vote trading as a market in votes in which legislators give away votes on issues that have lower marginal impact on their district (and therefore on their electoral fortunes) in exchange for votes on issues having a larger marginal impact. 
• Shortcomings: assumes there are no random or unforeseen future events that may influence outcomes or payoffs. Either the time dimension is suppressed or enforcement of agreements over time is left exogenous. Does not explain how legislators cope with agreements that cover more than one legislative session.
• Uncertainty over the future status of today's bargain come from:
1. Noncontemporaneous benefit flows - occurs when benefit flows to one party can be curtailed when the other party reneges on the agreement after they have already received their benefits.
2. Nonsimultaneous exchange - occurs when bills do not come up for a vote simultaneously. Bills evolve and public opinion can change. 
• Legislative institutions reduce the circumstances in which breakdown occurs; it is not a substitute for reputation building and trigger strategies commonly used in repeat play, but rather complement those strategies for circumstances in which those strategies fail.
• In the model in this paper, instead of trading votes, legislators exchange special rights affording the holder of these rights additional influence over well-defined policy jurisdictions. The extra influence over particular policies institutionalizes a specific pattern of trades and because the exchange is institutionalized, it need not be renegotiated each new legislative session and it is subject to fewer enforcement problems.

V. The Legislative Committee System

• Committees are decentralized decision-making units compose of those legislators with the greatest stake in their jurisdiction.
• The legislative committee system is defined by the following three conditions:
1. Committees are composed of a number of seats or positions, each held by an individual legislator. 
• Associated with each committee is a specific subset of policy issues over which it has jurisdiction; within their jurisdiction, committees possess the monopoly right to bring alternatives to the status quo up for a vote before the legislature.
• Committee proposals must command a majority of votes against the status quo to become policy.
2. There exists a property rights system over committee seats called the "seniority system." 
• A committee member holds his position as long as he chooses to remain on the committee; subject to his reelection, he cannot be forced to give it up.
• Leadership positions within the committee are allocated by seniority, the length of continuous service on the committee.
• Rights to committee positions cannot be sold or traded to others. 
3. Whenever a member leaves a committee, his seat becomes vacant and is filled using a bidding mechanism amongst the congressmen.
• Assertions about committee operation:
1. The assignment process operates as a self-selection mechanism.
2. Committees are not representative of the entire legislature but instead are composed of "preference outliers," or those who value the position highly.
3. Committee members receive the disproportionate share of the benefits from programs within their jurisdiction.
• Committee jurisdiction resolves noncontemporaneous benefit flows; a party cannot renege on an agreement to support a bill in another party's jurisdiction by later passing a new bill to revoke that original bill because the reneging party will not have the jurisdiction to bring that bill to a vote. 
• The legislative committee system effects on coalition formation:
1. Agenda power held by committee members implies that successful coalitions must include the members of the relevant committee or else the bill will not reach the floor for a vote; the committee veto reduces the feasible set of policies.
2. Trades among committee members are more likely to succeed that those across committees; inter-committee agreements have to bring separate bills to be voted on while intra-committee agreements can present a single bill that satisfies trading partners simultaneously once it is passed.
3. Policy will respond only to large changes in political circumstances or to major shifts in the electorate because forming new coalitions is difficult. 
• The majority rule condition precludes any one committee from extracting too many gains at the expense of others. 
• Policy in a particular area can remain stable if committee membership is relatively stable.

VI. Conclusion

• Legislative institutions enforce bargains among legislators.
• Given the peculiar form of bargaining problems found in legislatures, specific forms of nonmarket exchange are superior to market exchange.
• Empirical evidence supports four implications that follow from this model of legislative institutions but do no follow from a simple market exchange mechanism.
1. Committees are composed of "high demanders," that is, individuals with greater than average interest in the committee's policy jurisdiction.
2. The committee assignment mechanism operates as a bidding mechanism that assigns individuals to those committees they value most highly.
3. Committee members gain a disproportionate share of the benefits from their policy area. 
4. As the interests represented on tghe committee change, so too will policy, with the interests of non-committee members held constant. 

Michael Spence. 1973. Job Market Signaling

Michael Spence. 1973. "Job Market Signaling," The Quarterly Journal of Economics Vol. 87 #3 (August): 355-374.

Terms:

1. Indices - observable, unalterable attributes, such as race. Changes to such attributes are do not occur at the discretion of the individual.
2. Signals - observable characteristics attached to an individual that are subject to manipulation, such as education.
3. Signaling costs - the cost of manipulating a signal.

I. Hiring as Investment Uncertainty

• Hiring is an investment decision because it takes time to learn an individual's productive capabilities after they are hired.
• Hiring is a decision made under uncertainty because an individual's productive capabilities are not known beforehand.

II. Applicant Signaling

• Potential employees confront an offered wage schedule that are a function of signals and indices.
• Critical assumption: signaling will not effectively distinguish one applicant from another unless the signaling costs are negatively correlated with productive capability.
• If this condition does not hold, everyone will invest in the signal in exactly the same way and become undifferentiable.
• An alterable characteristic becomes an actual signal if the signaling costs aer negatively correlated with the individual's unknown productivity; this is a necessary but not sufficient condition.

III. Information Feedback and the Definition of Equilibrium

• New market information comes in to the employer through hiring and subsequent observation of productive capabilities as they relate to signals.
• An equilibrium occurs when the set of employer beliefs about signals and indices prior to hiring generate offered wage schedules, applicant signaling decisions, hiring, and new market data over time that are consistent with those intial beliefs; beliefs before and after hiring and observing are equivalent.

IV. The Informational Impact of Indices

• By themselves, indices could never tell the employer anything about productivity.
• Any informational impact of indices must be through their interaction with the educational signaling mechanism.
• There are externalities implicit in the fact that an individual is treated as the average member of the group of people who look the same and that, as a result, and in spite of an apparent sameness the opportunity sets facing two or more groups that are visibly distinguishable may in fact be different.
• The source of signaling and wage differentials is in the informational structure of the market itself. Differential signaling costs over groups are an important possibility. 

V. Conclusion

• The framework in this paper examines a basic equilibrium signaling model and one possible type of interaction of signals and indices. This framework can be used to examine phenomena ranging from selective admissions procedures, promotion, and loans and consumer credit.

Joe B. Stevens. 1993. The Economics of Collective Choice.

Joe B. Stevens. The Economics of Collective Choice. Boulder: Westview Press, 1993. Chapter 5.

This chapter considers whether there can be voluntary solutions to market failure without resorting to coercion by the government. For voluntary action to be effective, it would have to lead to a more efficient level of output or to the right people sharing more fully in the rewards.

Terms:

1. Willingness-to-pay (WTP) = what an individual would pay to gain access to new opportunities
2. Willingness-to-accept (WTA) = what an individual would accept as payment to be deprived of something; the consumer surplus is the minimum payment that would be required to compensate a consumer for reduced availability of a nonmarket good.
• Discrepancies between the WTP and WTA are due to fundamental differences in how people view potential gains and how they view potential losses. (Prospect Theory)
3. Marginal congestion costs - for an impure public good, the disadvantages of increased crowding associated with more people in a club. (For example, in a club that provides fire-fighting services, too many members increases the chances that the fire-fighting forces are occupied, helping another member, when your house catches on fire.)
4. Efficient club size - the level of membership that would equate the (falling) marginal reduction in service cost with the (rising) marginal congestion costs.

• There might be conflict between self-interest and the collective interest, such as in the case of the Prisoner's Dilemma, in which self-interested actions lead to a collectively worse outcome.
• The following help to allow for voluntary provision of goods:
• Researchers argue that feedback, learning, and game replay allow for the possibility of cooperation.
• It is possible for two individuals to work together to Pareto-efficiently provide a public good by paying prices equivalent to their respective marginal benefit of the public good, but free-riding would still be an issue.
• Externalities can be eliminated with property rights.
• People might not free-ride or might help to provide a public good for altruistic reasons.
• People may choose not to free ride because of the low cost of participation, because of the potentially high cost of nonparticipation (species extinction, for example), and because individual action may be crucial in affecting outcomes. 
• Hindrances to the voluntary provision of public goods:
• If transaction costs exist, there would be less incentive for two parties to agree on a Pareto-efficient quantity of the public good. If costs are high enough, they can prevent negotiated solutions altogether.
• Even with the allocation of property rights, the costs (transaction, monitoring, etc.) of a voluntary solution using property rights with unorganized and dissimilar groups are often so high that they siphon off the willingness to pay for the externality.
• Conditions for club provisions of goods:
1. "Provision" condition - labor and capital resources would need to be provided until the summed marginal benefits to members from reducing the congestion costs are equal to the marginal cost of provision.
2. "Toll" or "utilization" condition - an efficient toll should equate a member's marginal benefit from use with the marginal congestion costs that might be imposed on others. 
3. "Membership" condition - new members should be added until the net benefits from membership (through cost reductions to others) equal the congestion costs imposed on others by that member's use of services. If members have different preferences and incomes, there are likely to be differences in the amount and value of property to be protected. 

Harold Demsetz. 1967. Toward a Theory of Property Rights

Harold Demsetz. 1967. "Toward a Theory of Property Rights," American Economic Review 57, 2 (May): 347-59.

I. The Concept and Role of Property Rights

1. A primary function of property rights is that of guiding incentives to achieve a greater internalization of externalities. 
2. All that is needed to internalize externalities is ownership, which includes the right of sale.

II. The Emergence of Property Rights

1. Property rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization.
2. New property rights emerge to cope with new externality problems that come with changes in technology, the opening of new markets, changes in social mores, changes in common law precedents, etc.

III. The Coalescence and Ownership of Property Rights

1. Communal ownership means that the community denies to the state or to individual citizens the right to interfere with any person's exercise of communally-owned rights.
• Disadvantage:
•  Results in great externalities and rules out a "pay-to-use-the-property" system; high negotiation and policing costs make ineffective a "pay-him-not-to-use-the-property" system.
2. Private ownership implies that the community recognizes the right of the owner to exclude others from exercising the owner's private rights.
• Advantages: 
• The concentration of benefits and costs on owners creates incentives to utilize resources more efficiently.
• The cost of negotiating over externalities will be greatly reduced because any negotiations take place between two private owners; under communal ownership, negotiations would have to be between all users of the property.
• Negotiation options in the market to deal with externalities:
• Contractual agreement among owners that directly deals with externalities at hand. 
• The buyout of some owners by others. If there are several externalities, so that several contracts will need to be negotiated, or if the contractual agreements should be difficult to police, then outright purchase will be the preferred course of action.
3. State ownership implies that the state may exclude anyone from the use of a right as long as the state follows accepted political procedures for determining who may not use state-owned property.
4. Exception to the assertion that ownership tends to be an individual affair: publicly-held corporatism.
• Advantage:
• There might be significant economies of scale in the operation of large corporation if not all owners need to participate in the decisions the company must make.
• Disadvantage: 
• Depending on the structure of ownership, there may be some externality difficulties under the law of partnership; externalities depend on the liability of the owners. 

Avner Greif. 1994. Cultural Beliefs and the Organization of Society

Avner Greif. "Cultural Beliefs and the Organization of Society," Journal of Political Economy 102, 5 (1994): 912-950.

The paper models an economic transaction central to two trading societies (the premodern Muslim and Latin worlds) to examine the relations between culture and societal organization in the related multiple equilibria game.

1. Cultural Beliefs and the Organization of Society
• Cultural beliefs: the ideas and thoughts common to several individuals that govern interaction and different from knowledge in that they are not empirically discovered or analytically proved; how individuals (without coordination) expect others to act in various contingencies.
• Unlike strategies, cultural beliefs are qualities of individuals in the sense that cultural beliefs that were crystallized with respect to a specific game affect decisions in historically subsequent strategic situations. Past cultural beliefs provide focal points and coordinate expectations, thereby influencing equilibrium selection and society's enforcement institutions. 
• Organizations: the endogenous human constructs that alter the rules of the game and, whenever applicable, have to be an equilibrium.
• They reinforce the cultural beliefs that led to their adoption.
• Enforcement institutions are composed of cultural beliefs and the rules of the game. They may change in the long run as individuals attempt to improve their lot by establishing organizations that alter the rules of the game via players, information, payoffs. 
• Necessary condition for organizational change: those that initiate it expect to gain from it, based on cultural expectations.
• Once a specific organization is introduced, it influences the rules of historically subsequent games and hence the resulting societal organization. 
2. Agency Relations and Cultural Beliefs
• The societies of the eleventh century begin examined:
1. Genoa - long-distance overseas trade was central to Genoa's economy.
2. Muslim Mediterranean - Maghribi traders (Jewish merchants) were involved in large-scale, long distance trade all over the Mediterranean. 
• The merchant-agent commitment problem:
• Merchants needed to travel overseas to trade centers or obtain merchandise or hire agents who would do so and handle the merchandise. But an agent might embezzle the merchant's goods.
• For agents to be employed, the organization of society had to enable them to commit themselves ex ante to be honest ex post after receiving the merchant's goods. 
• Strategies of collectivist and individualist societies for dealing with agency relations:
• Premise for differences in strategies: in collectivist societies everyone is expected to respond to whatever has transpired between any specific merchant and agent; the opposite holds true for individualist societies and players are expected to be indifferent.
• In both societies, a merchant hires, for a wage, an unemployed agent whom he hires as long as cheating or forced separation does not occur.
• Differences: 
1. Under the individualist strategy, a merchant randomly hires an unemployed agent; under the collectivist strategy, a merchant randomly hires only from among the unemployed agents who have never cheated. 
2. Under the individualist equilibrium, merchants do not invest to acquire information because history has no value and an agent's wage is independent of it. Under a collectivist equilibrium, the optimal wage is a function of an agent's history and the merchant will invest. 
• In equilibrium for both individualist and collectivist societies, merchants randomly hire unemployed agents and agents never cheat. 
3. The Maghribis and Genoese: Origin and Manifestations of Diverse Cultural Beliefs
• Historical records indicate that cultural "focal points" as well as social and political events in the early development of Magribis and Genoese societies were likely to be instrumental in shaping diverse cultural beliefs and the related equilibria in these groups.
• Magribis - a collectivist equilibrium was a natural focal point.
• Genoese - an individualist equilibrium was the natural focal point. 
• Historical evidence indicates that the Maghribis invested in sharing information and the Genoese did not.
4. Within the Boundaries of the Game: Cultural Beliefs, Social Patterns or Agency Relations, and Wealth Distribution
• Under collectivist cultural beliefs, a merchant who cheated in the past (when he was hired as an agent) can no longer rely on collective punishment to deter his agent from cheating him and therefore has to pay a higher wage to keep the agent honest. Merchants acting as agents lose out in the long run, so merchants strictly prefer to hire other merchants as agents.
• Under individualist cultural beliefs, a merchant who cheats while providing agency services does not have to pay more to his agents in the future and hence a merchant is not motivate to employ another merchant. 
• Under individualist cultural beliefs, a society reaches a vertical social structure for a larger set of initial conditions than under collectivist cultural beliefs, where a society reaches a horizontal social structure for a larger set of initial conditions. 
• Maghribi trader relations with horizontal agency relations--merchants hiring merchants to act as agents--confirms this.
• Genoese traders with vertical agency relations--wealthy merchants rarely, if ever, functioning as agents and poor agents rarely, if ever, functioned as merchants--also confirms this.
• Vertical agency relations allowed greater upward mobility for the poorer than horizontal relations since in vertical agency relations, the ability to commit is negatively related to wealth. 
5. Transcending the Boundaries of the Game: Segregated and Integrated Societies
• A joint economy is segregated if, given the initial conditions, merchants from each economy strictly prefer to hire agents from their own economy.
• A joint economy is integrated if, given the initial conditions, merchants from at least on economy are indifferent about the original economy of their agents. 
• In response to geographical expansion of tradeable territories, there is some doubt whether collective punishment works in intereconomy agency relations; the uncertainty contributes to a higher optimal wage in a collectivist economy. As the merchants' cost of establishing intereconomy agency relations is higher than the cost of establishing intraeconomy agency relations, only the latter will be initiated and segregation would result (unless efficiency gains of intereconomy agency relations are sufficiently large).
• For two individualistic economies, intereconomy and intraeconomy optimal wages are the same because the uncertainty mentioned previously in the last bullet point is irrelevant for the determination of the optimal wage. Efficiency gains from intereconomy agency relations will motivate merchants to establish them.
• When intereconomy agency relations become possible between a collectivist and an individualist economy, a collectivist merchant would not initiate intereconomy agency relations regardless of the uncertainty regarding the individualist merchants' responses unless efficiency gains from interagency relations are high enough. 
• Because the collectivist economy's wage is lower, individualist merchants may find it optimal to establish intereconomy relations even if such relations do not imply efficiency gains. 
6. Transcending the Boundaries of the Game: Organizational Evolution
• In a collectivist society, coordinating collective punishment and what constitutes "improper" behavior is likely to be based on informal mechanisms such as customs and oral tradition.
• In an individualist society, formal legal and political enforcement organizations are needed to support collective actions and to facilitate exchange. A formal legal code is likely required to facilitate exchange by coordinating expectations.
7. Conclusions
1. Differences in the societal organization of the two trading societies can be consistently accounted for as reflecting diverse cultural beliefs.
2. The theoretical and historical importance of culture in might determine societal organizations, lead to path dependence of institutional frameworks, and in forestall successful intersociety adoption of institutions.
3. The collectivist system is more efficient in supporting intraeconomy agency relations and requires less costly formal organizations (such as law courts), but it restricts efficient intereconomy agency relations.
4. The individualist system does not restrict intereconomy agency relations but is less efficient in supporting intraeconomy relations and requires costly formal organizations. 

Russell Hardin. 1997. Economic Theories of the State

Russell Hardin. 1997. "Economic Theories of the State," in Dennis C. Mueller, ed., Perspectives on Public Choice: A Handbook, New York: Cambridge University Press, pp. 21-34.

I. Economic Theories of the State

1. Public goods theories -
• Involves one or both of two claims:
• Certain characteristics of public goods require that they be provided by a central agency acting on behalf of the larger group of beneficiaries
• Collective provision merely has advantages over individual provision
2. Coordination theories - 
• Counterpoint to the public goods theory; much of what makes the state plausibly valuable is not its provision of genuine public goods, many of which can successfully be provided by market devices. The state often just helps in the coordination of the multiple provision. That is the value of the state.
• In explanations of the rise of the state, coordination interactions have a conceptually prior status; without substantial coordination to produce order there is likely to be little exchange, hence little successful collective action. 
• Coordination theories of the state are distinctively different from public goods and prisoner's dilemma theories because once coordination by the state establishes social order and enables us to do other things successfully (all drive on the same side of the road), no one can free ride on the order created by others and everyone faces a net expectation of personal loss from going against that order.
3. Prisoner's Dilemma theories - 
• Prisoner's dilemma is the game theoretic model of dyadic exchange interactions when there are potential gains from trade. 
• In Hobbes theory, government is there to prevent unilateral appropriations of goods; this allows exchange to reduce to a matter of coordination in which both traders move to become better off as compared to their condition in the status quo before exchange.
• While the two-person prisoner's dilemma is resolvable with cooperation when iterated, the n-persons prisoner's dilemma for large n is not resolvable and requires the law and its regular application.
4. Evolutionary stability theories - states arise through successes in survival
• If the condition of anarchy is sufficiently chaotic and destructive of productivity and wealth, as Hobbes assumes, then the critical move of the public goods theory is the initial creation and maintenance of a viable state; but this must be the result of social evolution and coordination.
• Social-evolutionary account of the state: if a state takes on the task of some collective provision that gives the state greater survival value in the competition with other states and with potential anarchy, then the relevant collective provision tends to support that state. The capacity of the state to provide collective goods may be critical for its survival even if not for its origins. Provision of goods such as roads and coordinations such as order makes life enormously better, partly by stabilizing expectations and partly by elevating general welfare. 

Jon Elster. 1986. The Market and the Forum: Three Varieties of Political Theory

Jon Elster. “The Market and the Forum: Three Varieties of Political Theory.” In Foundations of Social Choice Theory, ed. Jon Elster and Aanund Hylland, 104-32. Cambridge: Cambridge University Press, 1986.

Social Choice Theory

o    Political process is an instrument rather than an end in itself.

o    The decisive political act is a private rather than public action. 

o    The structure is as follows: 

1.      Agents are given so the issue of a normative justification of political boundaries does not arise. 

2.      Agents confront a given set of alternatives so agenda manipulation is not an issue. 

3.      Preferences of agents are given and not subject to change in the course of the political process and those preferences are causally independent of the set of alternatives.                

-         In operation, individual preferences they are purely ordinal, complete, and transitive.

-         Social preference ordering of alternatives should be complete and transitive, Pareto-optimal, depend on only the relevant alternatives, and respect and reflect individual preferences, over and above the condition of Pareto-optimality (anonymity, non-dictatorship, liberalism, strategy-proofness).

Criticism of social choice theory: it embodies a confusion between the kind of behavior that is appropriate in the market place and that which is appropriate in the forum. The consumer is sovereign in the marketplace because he chooses between courses of action that differ only the in the way they affect him; in political choice situations, he is asked to express his preference over states that also differ in the way in which they affect others. A social choice mechanism is capable of resolving market failures that result from unbridled consumer sovereignty, but is hopelessly inadequate at redistributing welfare. The task of politics is not just to eliminate inefficiency, but to create justice--a goal to which the aggregation of political preferences is an incongruous means.

The transformation of public preferences through public and rational discussion:

-         The conceptual impossibility of expressing selfish arguments in a debate about the public good and the psychological difficulty of expressing other-regarding preferences without ultimately coming to acquire them bring about that public discussion tends to promote the common good.

-         Elster objects to this line of argument because not everyone will deliberate, there are time constraints, rational arguments will not align underlying values or eliminate self-interest.

What makes democracy superior are its side effects on economic prosperity. But those side effects can not be what motivate a government to pursue democracy because then society would not believe in democracy on any other ground and the side effects that come with it would not be produced.

The political process is:

1.        instrumental in purpose

2.        an end in itself, a good or even the supreme good for those who participate in it

3.        and/or both