The Game of the Committees : A Design to Overcome Rent Seeking?

1. The Game of the Committees:A Design to Overcome Rent Seeking? 1

2. Colloquium in Human Resource ManagementChair of Professor Dr. Bruno Staffelbach, Zurich 2010 Presentation by Peter T. Baltes,Swiss Military Academy at ETH Zurich For their kind help the author thanks: Carine Bisenius, Walter Furter, Odilo Gwerder, Sinan Narin, Martin Sievers, Maximilian Zangger and Xiaoyun Zhou 2

3. The General Economic Challengeto Constitutions: Rent Seeking I 1965 / 1971 1982 2000

4. The General Economic Challengeto Constitutions: Rent Seeking II “Definition [of Rent Seeking]:The opportunity to capture monopoly rents provides firms with an incentive to use scarce resources to secure the right to become a monopolist. Such activity is referred to as rent-seeking. Rent-seeking is normally associated with expenditures designed to persuade governments to impose regulations which create monopolies.” OECD(highlighting by PTB)

5. The General Economic Challengeto Constitutions: Rent Seeking III Social Market Economy: A combination of two principles (1) Equal rights for all participants(Kantian Categorical Imperative) (2) Public help to approximately ensure existence and sufficient competitiveness ( different minds/bodies/backgrounds or plain luck) Screening problem due to asymmetric information: Specific Plea for Support – justified or not? Unjustified pleas = Rent Seeking (Buchanan, Tullock or Olson)= Violation of these two principles

6. In Search of An Iraqi Constitution;Free of Rent Seeking ?

7. The Model: The Principal and the Groupsof Iraqi Society as Agents • Main Idea of the Model: • Use the groups themselves as experts / agents. • Employ a mechanism that provides a sufficient incentive to refrain from rent seeking. T1 T2 T3 Principal … Tn The various Iraqi tribes (Ti), ethnic groups orreligious factions are represented by n clones.

8. The Setting: Determining the “Iraqi cake” Only three different states of welfare are available to the groups T1 • Civil War = current statusEach group earns “today” (= t0) a present value of Zero. T2 • Dictatorship = status in the past The group acting as dictator gains in t0 a PV of v>0. All other groups remain at a level of Zero. T3 • Social Market Economy = goal of the principalAll groups earn on average “today” (= t0) a PV of k>0. Principal … Rent seeking = losses in efficiency(Intuition: Discrimination causes incentive problems) Tn

9. The Path of Investigation Two questions are examined: • For , T1 which design features must a specificmechanismdesign possess to guaranteea constitution free of rent seeking?= Case I T2 • Which level of information asymmetry can be handled by the identified mechanism design in regard to the relationship between v, k and n?= Case II T3 Principal … Tn Rent seeking = losses in efficiency(Intuition: Discrimination causes incentive problems)

10. Case I:The Design Features of the Mechanism I • All agents are risk-averse: Common knowledge! • All agents face costs of delay: T1 Kn • All agents seek to maximize their utility. T2 Kn-3 • In t0, the principal starts the game: • Each group transforms to a committee Ki. K1 T3 • Its mission: Be ready to develop a proposalfor the constitution in a specified period of time. Principal … • In secret, the principal determines a random sequence for the K1 to Kn committees. K5 Tn

11. Case I: The Design Features of the Mechanism II t1 t2 t0 Option 1: No change to status quo. Accept the proposal.Immediate payoffs to groups according to the proposal. Option 2: Let T1 be a dictator. Reject the proposal. Option 3: Let T5be a dictator. Option 1 K1 K2 Option 2 Option x: Let T2 be a dictator,but pay b to Tn-4. Option 3 Option … Option … • General rules to end the game: • A proposal of Kimust be accepted by the successor Ki+1. • If all other proposals are rejected, the last committee can come up with their own version – and this version will always be accepted as the definite constitution. K3

12. An Example:The Scenario With Two Committees Initial Point in t0: K1 starts to work. t1: K1 proposes status quo. t1: K1 proposes to become a dictatorK2 / T2 receives no compensation. t1: K1 proposes “equal rights”. t1: K1 proposes tobecome a dictator,but offers bribe. t1: K1 proposes T2 should becomea dictator.

13. An Example:The Scenario With Two Committees t1/2: K2rejects and proposes status quo. Initial Point in t0: K1 starts to work. t1: K1 proposes status quo. t1/2: K2rejects and proposes to be-come a dictator. t1: K1 proposes to become a dictatorK2 / T2 receives no compensation. t1/2: K2rejects and proposes “equal rights”. t1: K1 proposes “equal rights”. t1/2: K2rejects and proposes to be-come dictator, but compensates T1. t1: K1 proposes tobecome a dictator,but offers bribe. t1/2: K2rejects and proposes T1 should become dictator. t1: K1 proposes T2should becomea dictator. t1: K2accepts K1’s proposal.

14. Solving the Scenario With Two Committeesby Backward Induction t1/2: K2rejects and proposes status quo. Initial Point in t0: K1 starts to work. t1: K1 proposes status quo. t1/2: K2rejects and proposes to be-come a dictator. t1: K1 proposes to become a dictatorK2 / T2 receives no compensation. t1/2: K2rejects and proposes “equal rights”. t1: K1 proposes “equal rights”. t1/2: K2rejects and proposes to be-come dictator, but compensates T1. t1: K1 proposes tobecome a dictator,but offers bribe. t1/2: K2rejects and proposes T1 should become dictator. t1: K1 proposes T2should becomea dictator. t1: K2accepts K1’s proposal.

15. Case I: Conditions Necessary to Guaranteea Constitution Free of Rent Seeking Solving the game by backward induction identifies the following features: • Costs of delayincrease the willingness to accept the predecessor's proposal. • A committee‘s proposal will only be accepted by the successor, if it offers the successor at least the same level of welfare they can secure for themselves by setting up their own proposal.“Bribing the successor” may work  becoming “king without support” doesn’t – Exception: The last committee. • The amount necessary to be paid out as “bribes” increases as the number of committees available as next successor increases. Number of candidates increases incentive to refrain from rent seeking.

16. Case I: Conditions Necessary to Guaranteea Constitution Free of Rent Seeking Solving the game by backward induction identifies the following conditions: • If a proposal is rejected by the successor, the committee has no influence on the results of the remaining game stages and will be treated as “non-existent”.Proposal = One-shot-trial. Risk-aversion decreases incentive for selective bribing. • Still the bargaining position of the second committee is too weak: • The principal strengthens the second committee’s position by declaring that he will ex ante reveal the identity of the third committee in public before the second committee starts to work (principal’s revelation). A minimum of five committees is required to ensure a constitution, free of rent seeking.

17. Case II: The Game of the Committeesis Able to Protect Those in the Shadows • Game is played by five committees. • Sector where at least one strategy of rent seeking dominates the proposal of a morally justified Social Market Economy.

18. Conclusions and Further Research • Economics of Information: Replacing Paretian Welfare Economics with Neokantian Economics? • Model offers an economic perspective on “Why committees?”  “committee mania” / Kommissionitis. • The relation between General Economics and Economics of Defense: Not a one-way street. • Adam Smith and the tradition of the neutral observer and umpire Paradox? “In many relevant cases there can be no neutral observer because neutrality implies having no stakes in the issue, but without stakes the person lacks the required information.” “I suggest we drop the words Pareto optimalityand thus shorten our articles by perhaps five-tenths of a percent.”Gordon Tullock (1999) • A better understanding of rent seeking? • Further research: Streamlining the mechanism / generalization of the results.