Work detail

Economics of Constitutional Games

Author: PhDr. Martin Gregor
Year: 2003 - summer
Leaders: prof. RNDr. Ing. František Turnovec CSc.
Work type: Economic Theory
Language: English
Pages: 91
Awards and prizes: M.A. with distinction from the Dean of the Faculty of Social Sciences for an excellent state-final examination performance and for an extraordinarily good masters diploma thesis
Abstract: Economic science depicts constitutions as incomplete multilateral contracts adopted under the rule of unanimity. Following the definition, constitutional economics inquires into the possibility of emergence of a constitutional arrangement as such. Can self-interested rational decision-makers pass approval to an incomplete multilateral contract? In what way do the economising players calculate benefits and costs arising with collective decision-making? Specifically, of available decision-making rules, will they opt for the division of power as an insurance mechanism? These topics are subjects of author's concern.
At the outset, the results of non-cooperative game theory illustrate deadlocks of collective dilemmas. As early as in Section One, the simplest version of a constitution is proved to arise, however. This has been possible under specified conditions of credibility; therefore, two models of credibility are constructed. The solution nevertheless holds only for a complete bilateral constitution. In multilateral setting a perfectly specified constitution is unavailable unless external incentives are introduced.
In Section Two, a more complicated way to escape the free-riding incentives is introduced. Uncertainty of upcoming collective dilemmas (uncertain parameters of public good production, or uncertain payoffs in games etc.) along with homogenisation of players behind the "veil of uncertainty" are assumed to allow for an incomplete constitution to emerge. This section might explain why a constitutionally approved entity, for example the reconstitutionalised European Union, be ex ante welfare enhancing for all parties.
An incomplete contract must set clear decision-making procedures for an inherently unclear environment. Because of implausibility of benevolent despot assumption, granting discretionary power to a superior body is risky. That is why a constitution necessarily sets limits to decision-making. Numerous decision-making rules regarding the division of power, voting rules, and constitutional safeguards are available. In Section Three I thus choose division of power to elaborate as an instrument improving efficiency of decision-making. In spite of additional costs imposed on decision-makers (constrained discretion), expected benefits may override expected costs, and thus be approved by a constitutional convention.
The paper takes perspective of constitutional economics and attempts to demonstrate that a constitution solving collective dilemmas (public goods, externalities etc.) has a chance of adoption in the course of a constitutional game. However, any solution is costly because of publicly induced dilemmas and government failures.
Downloadable: Diploma Thesis - Gregor


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