Public choice and the economic analysis of anarchy: a survey

Public choice economists began studying anarchy in the 1970s. Since then, the amount of research on anarchy has burgeoned. This article surveys the important public choice contributions to the economics of anarchy. Following early public choice economists, many economists are researching how individuals interact without government. From non-public-interested explanations of the creation of government to historical studies of internalizing externalities under anarchy, public choice scholars are arriving at a more realistic perspective of human interaction with and without government. Although the economics of politics receives more attention, the economics of anarchy is an important area of research in public choice.     

Rent seeking and market competition

This paper emphasizes that political behavior of interest groups is a result of economic calculation, and therefore is affected by the market conditions under which they operate. We develop a two-stage game to link political and market decision-making. We find that if unproductive rent-seekingdirectly contributes to rent-seekers' market operations, then their lobbying efforts will be excessive if the number of outsiders is relatively large, restrained if it is relatively small. If rent-seekingdirectly impairs rent-seekers' market operations, the above described behavior will be reversed. The analysis also reveals that as wasteful rent-seeking may increase rent-seeker's production cost, market competition shifts production from now less efficient rent-seekers to their non-rent-seeking rivals. Welfare gains from this shift may overshadow the direct waste of influence activities.     

Anarchy,self-governance,and legal titling

Scholars and policymakers prescribe legal titling to improve prospects for economic development and political order. However, a public choice literature exists that has long recognized that self-governance often works well and that the state may not be able to improve upon local economic institutions at reasonable cost. Although the implication that legal titling should proceed with caution is seemingly straightforward, the literature on legal titling does not take anarchy seriously as a policy option. In addition, there is a public choice literature that presumes the state is the most important source of property rights. This essay fills this gap in the property rights literature by applying the concept of “efficient anarchy” to legal titling in Afghanistan. Original fieldwork evidence from rural Afghanistan suggests that anarchy of land governance is a better option than legal titling. The essay concludes by opening up the black box of state building by explaining why it often makes sense to sequence improvements in political capacity and political constraints prior to investing in legal titling.     

Non-global social contracts: A note on inefficient social institutions

This paper explores some perverse features that can emerge when social contracts are moved from a social vacuum to a setting of social interdependence. In particular we note incentives that might exist in conjunction with externality problems that yield situations in which: (1) social contracts reduce social wealth; (2) sub-global social contracts are Pareto inferior to the absence of social contracts; (3) there are no incentives for global social contracts. While previous works emphasized the benefits of contracts, this paper focuses on their costs. A conclusion reached is that perhaps justice and efficiency demand not a single global social contract but rather a rich melange of sub-global contracts with appropriate interstices of anarchy.     

On the limits to rent-seeking waste

The general equilibrium framework developed in this paper for analyzing the limits to rent-seeking waste goes beyond the existing literature by incorporating tax-financed, public subsidies and rent-protecting activities into a rent-seeking environment. We show that the limits to rent-seeking waste depend on the extent to which government subsidizes rent seekers and rent defenders through tax-financed grants, contracts and favors. As observed by Tullock (1967), the diversion of resources toward efforts to acquire a monopoly rent causes a social waste in addition to the excess burden of monopoly pricing measured by the Harberger triangle. In the absence of government subsidies to rent-seeking and under competitive conditions, this additional waste cannot exceed the maximum monopoly rent attainable. However, if government subsidizes expenditures on rent-seeking, then the additional waste can exceed the Tullock rectangle of monopoly rent and, in the limit, equal the economy's maximum potential social surplus.Rent avoidance expenditures reduce the rent to be captured and thus discourage rent-seeking. If rent avoidance is a relatively efficient mechanism for transferring consumer surplus to rent granters, then rent-seeking expenditures are displaced by less wasteful expenditures on rent defending. As a result, under competitive conditions, unsubsidized demand for private rent protection may be socially efficient. Nonetheless, the upper limit to rent-seeking waste depends on constitutionally determined maximum rates of public subsidies to rent-seeking and rent-avoidance activities.     

Improper Selection of High-Cost Producers in the Rent-Seeking Contest

The resources two rival businesses spend to raise their own chanceof getting a unique monopoly license are a cost of rent-seeking.When those businesses differ in the costs of producing themonopoly good there is an additional cost of rent-seeking that hasnot been sufficiently studied in the literature. If the high cost producer winsthe license, the difference between his cost and the costs of hismore efficient rival is a social loss from improper selection ofproducers by the political process. The loss becomes more severewhen the ability to lobby of the inefficient producer outstripsthat of the efficient producer. This may help to explain whyspecialized lobbying evolved. Specialized lobbying reduces thesocial cost from improper selection of firms by allowing efficientproducers to hire expert rent-seekers and so to raise theirchances of gaining monopoly concessions.     

The political economy linkage between trade liberalization and domestic environmental regulations

This paper considers the political economy linkage between trade liberalization and domestic environmental regulations in a duopolistic product market. We investigate the environmental consequences and welfare implications of a home country’s unilateral tariff reduction on a polluting good. In a framework where the domestic environmental tax is subject to the influence of the home firm, we find that a tariff reduction on a good producing a consumption-type externality will improve the home country’s environmental quality. Moreover, we find that the home country’s tariff reduction will unambiguously enhance the home country’s welfare; and it will damage the foreign firm’s profits and thus the foreign country’s welfare, provided that the weight that the home government attaches to its social welfare is sufficiently small. This result also suggests the possibility that a unilateral tariff reduction will achieve a Pareto improvement.     

The Mythology of Privatization in Contracting for Social Services

States and municipalities have privatized services in an effort to improve their cost‐effectiveness and quality. Competition provides the logical foundation for an expectation of cost savings and quality improvements, but competition does not exist in many local marketplaces—especially in the social services, where governments contract primarily with nonprofit organizations. As government increases its use of contracting, it simultaneously reduces its own public‐management capacity, imperiling its ability to be a smart buyer of contracted goods and services. This article examines two questions about the privatization of social services based on interviews conducted with public and nonprofit managers in New York state: Does social services contracting exist in a competitive environment? And do county governments have enough public‐management capacity to contract effectively for social services? The findings suggest an absence of competition and public‐management capacity, raising the question of why governments contract when these conditions are not met.     

Gypsy law

How do the members of societies that can’t use government or simple ostracism produce social order? To investigate this question I use economics to analyze Gypsy law. Gypsy law leverages superstition to enforce desirable conduct in Gypsy societies where government is unavailable and simple ostracism is ineffective. According to Gypsy law, unguarded contact with the lower half of the human body is ritually polluting, ritual defilement is physically contagious, and non-Gypsies are in an extreme state of such defilement. These superstitions repair holes in simple ostracism among Gypsies, enabling them to secure social cooperation without government. Gypsies’ belief system is an efficient institutional response to the constraints they face on their choice of mechanisms of social control.     

THE RATIONALE FOR GOVERNMENT INTERVENTION IN SELLER-CONSUMER RELATIONSHIPS

Government intervention in the form of consumer protection is appropriate where consumers have less than the required amount of information to protect themselves, where transaction costs act to reduce consumer self-protection below acceptable levels, where consumer welfare is not sufficiently considered in oligopolistic markets, where private costs and social costs diverge due to externalities, where a certain level of quality assurance is necessary if markets are to function and where riskier products removal from the market lowers firms' insurance premiums as well as serves the interest of public health and safety. Consumer protection is a public good which will not be available in optimal quantities without government intervention.     

Revisiting the ideological congruence controversy

One of the limits of previous studies using respondents’ self‐placements and subjective party placements to examine levels of citizen‐government congruence is that they were limited to the post‐1995 period. This article extends the number of elections where it is possible to examine levels of citizen‐government ideological congruence with a survey‐based approach. In particular, a unique dataset has been collected that combines data from the Comparative Study of Electoral Systems and several national election studies. The results confirm recent studies that show that levels of citizen‐government ideological congruence are similar under majoritarian and proportional representation (PR) systems. Such studies, however, did not provide evidence that congruence is maintained over the course of a government's mandate. This article introduces, therefore, two measures of citizen‐government congruence that address this issue and that may revive the debate about which electoral systems strengthen the citizen‐government connection: citizen‐government congruence at the end of government mandates and change in congruence between elections. The results indicate that governments stay closer to the median citizens between elections under PR systems than under majoritarian systems. It is found, however, that this decrease in congruence in majoritarian systems is not detrimental to the point of observing smaller levels of congruence at the end of government mandates under majoritarian systems than under PR systems.     

Rent seeking and the welfare cost of trade barriers

This paper estimates the potential social cost of trade barriers using the Harberger and the Tullock/Posner approaches for a sample of U.S. food and tobacco manufacturing industries. In addition, it tests the relationship between the computed welfare losses and special-interest political activity (PAC contributions). If all rents were dissipated through rent seeking, the social cost of trade barriers would be about 12.5 percent of domestic consumption and would be particularly large for sugar and milk products where quotas are the main instrument of protection. Furthermore, the results indicate that welfare losses are positively associated with industry lobbying but the strength of such association is strongly dependent on industry concentration.     

Central Bank Independence and Deflation

Deflation presents special challenges to central banking, as traditional monetary policy tools are highly inefficient in dealing with deflationary pressures. In this case, the Federal Reserve must use alternative monetary policy tools that are specially designed to artificially boost asset prices through “printing press” or currency manipulation. Unfortunately, these alternative monetary policy tools create unintended political, geopolitical, and social consequences that overreach into the direct responsibilities of other branches of government. Thus, the government must be able to influence Federal Open Market Committee decisions that potentially affect (or contradict) U.S. foreign policy, U.S. trade policy, U.S. dollar policy, and deliberate domestic/global wealth distribution policies.     

Selling Eastern Europe's social housing stock: Proceed with caution

Abstract

As the countries of Eastern Europe begin to reorient their housing sectors toward the private market, many quarters are advocating selling the units in the social sector—typically about one‐fourth of the housing stock—to the tenants. Whether purchasing their units is attractive to tenants depends on the sales price, current and expected rent levels, availability and terms of financing, and the strength of tenant rights of occupancy. Drawing lessons from the experiences of three countries—China, Hungary, and the United Kingdom—in selling social sector rental units, this paper concludes that too much emphasis has been placed on lowering the sales price compared with changing other conditions. This practice results in a substantial loss of revenue to government and a questionable distribution of the nation's wealth.     

New evidence on government efficiency

Government is generally not considered an efficient producer. Yet, conceptually, it is relatively simple to construct a system of incentives and controls that should lead to efficiency. The outcomes of over 1700 recent competitions between government producers and the private sector, conducted under OMB's Commercial Activity (CA) Program, provide new evidence. Analysis of the Navy's CA program outcomes demonstrates that the government is as efficient as the private supplier at least 21% of the time. The local incentives and controls that induce this outcome are not widespread, however. Less than half of the government managers selected an efficient mix of inputs without a competitive stimulus and an additional seven percent of the managers did not do so even then.     

Centrelink – Viewed from the Community Sector

The government's introduction of a new service delivery agency, Centrelink, to deliver a range of programs including income support has been heralded as a major step forward in government service provision. Certainly no one would dispute that an improved level of service delivery can have major benefits for many low-income and disadvantaged people. However, it is becoming more apparent that there are tensions between the strong emphasis being placed on improving customer services and a social security system predicated on rights and entitlements under legislation. In a system where the former takes priority, the satisfaction of numerous customers with relatively uncomplicated situations may well be considered a more valuable outcome than the satisfaction of one person with a very complex situation that may require a high input of resources. When dealing with a 'service' such as income support – where people's access to assistance can make a fundamental difference to their ability to live decently – it is imperative that great care is taken before managerial and administrative models, such as a 'purchaser-provider split', are imported from other sectors. This article will explore these issues from the perspective of the community sector, particularly those who assist and advocate on behalf of low-income and disadvantaged people.     

Helping Friends or Influencing Foes: Electoral and Policy Effects of Campaign Finance Contributions

Campaign finance contributions may influence policy by affecting elections or influencing the choices of politicians once in office. To study the trade‐offs between these two paths to influence, we use a game in which contributions may affect electoral outcomes and signal policy‐relevant information to politicians. In the model, a campaign donor and two politicians each possess private information correlated with a policy‐relevant state of the world. The donor may allocate his or her budget to either an ally candidate who has relatively similar preferences or a moderate candidate whose preferences are relatively divergent from the donor's preferred policy. Contributions that increase the likelihood of the moderate being elected can signal good news about the donor's preferred policy and influence the moderate's policy choice. However, when the electoral effect of contributions is too small to demand sufficiently high costs to deter imitation by groups with negative information, this informational effect breaks down.     

In Search of Successful Reform: The Politics of Opposition and Consensus in OECD Parliamentary Democracies

Why are some governments able to undertake controversial policy reforms and others are not? Conventional wisdom argues that single-party majority governments are best able to implement reforms because there are fewer veto actors within the government that can block the reforms. However, these accounts fail to consider the veto power of societal actors and particularly of trade unions, which can stall reform even in the presence of a unified executive. This paper argues that controversial reforms require broad societal and, consequently, political consensus, which are easier to achieve under minority governments or governments of broad coalitions. Evidence from 22 OECD parliamentary democracies over 35 years shows that minority and large coalition governments have been more successful in reducing social security contributions and pensions than narrower majority governments. This is especially true in countries where trade unions are militant and often resort to industrial action.     

The dilemma of government responsiveness

The expectation that the government will respond to future circumstances, say bailing out a dictator to avoid a bloodbath, or raising taxes on immovable capital investments, often hinders the establishment of appropriate incentives for efficient behavior. The government's dilemma, simply, is that it may be unable to commit future governments not to be responsive. Contracts and constitutional provisions are mechanisms to limit responsiveness. So too are arrangements that increase the cost of being responsive, or build reputations for adhering to certain patterns of behavior. A promising strategy for being responsive is to base government actions on variables not under the control of individuals, such as unalterable characteristics or aggregate outcomes. These are at best palliative measures: Informed policy making must recognize the tension between providing appropriate incentives and permitting government to be responsive.     

External Actors,State‐Building,and Service Provision in Areas of Limited Statehood: Introduction

This article introduces the themes and arguments of the special issue. While virtually all polities enjoy uncontested international legal sovereignty, there are wide variations in statehood, that is, the monopoly over the means of violence and the ability of the state to make and implement policies. Areas of limited statehood are not, however, ungoverned spaces where anarchy and chaos prevail. The provision of collective goods and services is possible even under extremely adverse conditions of fragile or failed statehood. We specify the conditions under which external efforts at state‐building and service provision by state and nonstate actors can achieve their goals. We focus on the extent to which external actors enhance the capacity (statehood) of authority structures in weak states, or directly contribute to the provision of collective goods and services, such as public health, clean environment, social security, and infrastructure. We argue that three factors determine success: legitimacy, task complexity, and institutionalization, including the provision of adequate resources.