About the failure of political Coase theorem
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Date
2019
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Publisher
Ivane Javakhishvili Tbilisi State University Press
Abstract
Economic institutions and behavior models are endogenous variables and represent an
obvious or non-obvious agreement (contractual process), the result of the collective actions of economic and political agents. From this follows the question: under what conditions can be achieved Pareto-effective political agreement among the social agents about the creation of economic institutions? In other words, does political Coase theorem work or not, which suggests free and voluntary exchange of economic and political rights and consequently, effective institutions.
As in the case of Coase “starting” theorem, the basis for such collective actions (exchange
of powers) is to increase the collective benefit or public wealth. This gain can be
distributed among the members of the public and may increase their individual benefits or
compensate economic and political “victims.” Thus, changes in institutions and behavior
models, as Pareto-improvement, are common interest. This means that the creation of effective rules, through the voluntary agreements between the parties, is conceptually possible.
In terms of game theory, this means that there is a possibility of cooperative play
between economic and political agents, when the joint actions of the parties can create an
institution, which results in overall profit (in which indicators this profit is expressed, in this
case, does not matter).
Analysis involves certain pre-requisites, specifically: - there is some ineffective institutional
structure (property rights, distribution of income, etc.); - there is a more effective institutional model (pareto-improvement);- there is no principal obstacle to presenting this
institutional model as a political project; - parties (politicians, asset owners, scientists, etc.)
have sufficient qualifications and experience to create a new institutional model.
Why do not economic and political agents work together to improve institutional
structure and gain profit? What hinders the realization of the Coase theorem in politics?
Expenses incurred by public agents for changing institutional structure, i.e. obstacles
to the realization of the “political Coase theorem” are:
• Political transaction costs: the costs for optimal distribution of power; the costs of
conducting negotiations; the costs of changing the formal and informal organization of the
system; “Transition costs” (changing the rules requires expenses for all socio-economic and political players) etc. In the absence of these expenses, the optimal set of “rules of the game” would be established everywhere and always, since replacing any “outdated” institution with a new one, with more effective one, would “cost” nothing;
• Absence of motivation for creating eff ective rules. Parties (at least on one side)
may not be interested in overall profi t, as there are alternative ways of making private profit (economic and political rent). Its source is asymmetry in the distribution of power. The rent source can also become asymmetric information;
• Institutional changes are “creative destruction.” Increasing effectiveness of institutions
may result in the loss of income, power and ownership by individual economic and
political agents. This results in potential “losers” resistance to institutional changes;
• The problem of trust between the parties. This means absence of belief that that
maximizing the functionality of the public benefit will positively affect the individual function
of benefits;
• The problem of credible promises. There are not “reliable” mechanisms for the
distribution of the gain of social income in favor of any of the parties. It is about the absence of a coercive mechanism (third party) for the fulfillment the obligations. In other words, as there is no guarantee of redistribution of benefits, there are no incentives for perfection of institutions;
• Problems of preferences. Power for its owner is not just an opportunity to achieve
goal (for example, receiving rental income). It is a “wealth” in itself, and therefore it can be
the ultimate goal;
• “Time horizons” of institutional changes. The difference in time between the cost
of the institutional changes and the benefits derived from these changes weakens the motivation of institutional changes, which gives the effect in the long term.
Thus, according to the political “Coase theorem,” people can always negotiate and
exchange powers. But as a result of the combined constraints, many of them are of insurmountable nature, Coase theorem does not work in politics; i.e. always remain missed alternative institutional capabilities. Rational, maximized behavior can not overcome all costs, which are necessary for the establishment of effective institutions.
Description
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Keywords
institutions, political Coase theorem, belief, social conflict, transaction costs, commitment problem
Citation
Economics and Business, №3, 2019, pp. 40-57