schweizer armee höhere kaderausbildung der armee militärakademie an der eth zürich the game of...

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Schweizer ArmeeHöhere Kaderausbildung der ArmeeMilitärakademie an der ETH Zürich

The Game of the Committees: A Design to Overcome Rent Seeking?Peter T. Baltes, Zurich 2010

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

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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

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The The General Economic ChallengeGeneral Economic Challengeto to Constitutions: Rent Seeking IConstitutions: Rent Seeking I

1965 / 1971

19822000

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The The General Economic ChallengeGeneral Economic Challengeto to Constitutions: Rent Seeking IIConstitutions: 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)

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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)

The The General Economic ChallengeGeneral Economic Challengeto to Constitutions: Rent Seeking IIIConstitutions: Rent Seeking III

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

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?

In Search of An Iraqi Constitution;In Search of An Iraqi Constitution;Free of Rent SeekingFree of Rent Seeking

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Main Idea of the Model:1. Use the groups themselves as experts / agents.

2. Employ a mechanism that provides a sufficient incentive to refrain from rent seeking.

The Model: The Principal and the GroupsThe Model: The Principal and the Groupsof Iraqi Society as Agentsof Iraqi Society as Agents

Principal…

Tn

T3

T1

T2

The various Iraqi tribes (Ti), ethnic groups orreligious factions are represented by n clones.

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1. Civil War = current status Each group earns “today” (= t0) a present value of Zero.

The Setting: Determining the “Iraqi cake”The Setting: Determining the “Iraqi cake”

Principal …

Tn

T3

T1

T2

Only three different states of welfare are available to the groups

2. 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.

3. Social Market Economy = goal of the principal All groups earn on average “today” (= t0) a PV of k>0.

Rent seeking = losses in efficiency(Intuition: Discrimination causes incentive problems)

n k v k 0

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1. For ,

The Path of InvestigationThe Path of Investigation

Principal …

Tn

T3

T1

T2

Two questions are examined:

2. 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

Rent seeking = losses in efficiency(Intuition: Discrimination causes incentive problems)

vnn k v k 0 k

v vn 1 nv k 0

which design features must a specificmechanism design possess to guaranteea constitution free of rent seeking?= Case I

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1. All agents are risk-averse:

Case ICase I::The Design Features of the Mechanism IThe Design Features of the Mechanism I

Principal …

Tn

T3

T1

T2

i iU x x

2. All agents face costs of delay: d 0.8,1

Common knowledge!

v vn 1 nv k 0

4. In t0, the principal starts the game:

a) Each group transforms to a committee Ki.

c) In secret, the principal determines a random

sequence for the K1 to Kn committees.

b) Its mission: Be ready to develop a proposalfor the constitution in a specified period of time.

K5

K1

Kn

Kn-33. All agents seek to maximize their utility.

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Case ICase I: : The Design Features of the Mechanism IIThe Design Features of the Mechanism II

t0

i iU x x d 0.8,1v vn 1 nv k 0

Option 1: No change to status quo.

K1 K2

Option 2: Let T1 be a dictator.

Option 3: Let T5 be a dictator.

Option x: Let T2 be a dictator,

but pay b to Tn-4.

t1

Option …

Reject the proposal.

Option 1

Option 2

Option 3

Option …

Accept the proposal.Immediate payoffs to groups according to the proposal.

K3

General rules to end the game:1. A proposal of Ki must be accepted by the successor Ki+1.

2. 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.

t2

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An ExampleAn Example::The Scenario With Two CommitteesThe Scenario With Two Committees


Initial Point in t0:K1 starts to work.

t1: K1 proposesstatus 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.

v v2 1 2v k 0

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An ExampleAn Example::The Scenario With Two CommitteesThe Scenario With Two Committees







t1: K1 proposes T2

should becomea dictator.

t1: K2 accepts K1’s proposal.

t1/2: K2 rejects and proposes T1 should become dictator.

t1/2: K2 rejects and proposes “equal rights”.

t1/2: K2 rejects and proposes to be-come dictator, but compensates T1.

t1/2: K2 rejects and proposes status quo.

t1/2: K2 rejects and proposes to be-come a dictator.

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Solving the Scenario With Two CommitteesSolving the Scenario With Two Committeesby Backward Inductionby Backward Induction

i iU x x d 0.8,1v2v k 0






t1: K1 proposes T2

should becomea dictator.

t1: K2 accepts K1’s proposal.

t1/2: K2 rejects and proposes T1 should become dictator.

t1/2: K2 rejects and proposes “equal rights”.

t1/2: K2 rejects and proposes to be-come dictator, but compensates T1.

t1/2: K2 rejects and proposes status quo.

t1/2: K2 rejects and proposes to be-come a dictator.

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Case ICase I: Conditions Necessary to Guarantee: Conditions Necessary to Guaranteea Constitution Free of Rent Seekinga Constitution Free of Rent Seeking


Solving the game by backward induction identifies the following features:

(2) 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.

(3) 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.

(1) Costs of delay increase the willingness to accept the predecessor's proposal.

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Solving the game by backward induction identifies the following conditions:

(4) 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.

(5) 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.

Case ICase I: Conditions Necessary to Guarantee: Conditions Necessary to Guaranteea Constitution Free of Rent Seekinga Constitution Free of Rent Seeking

i iU x xv vn 1 nv k 0

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• Game is played by five committees.

Case IICase II: The Game of the Committees: The Game of the Committeesis Able to Protect Those in the Shadowsis Able to Protect Those in the Shadows

• Sector where at least one strategy of rent seeking dominates the proposal of a morally justified Social Market Economy.

i iU x x*vn

v k 0

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• Economics of Information: Replacing Paretian Welfare Economics with Neokantian Economics?

Conclusions and Further ResearchConclusions and Further Research

• 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.”

• Further research: Streamlining the mechanism / generalization of the results.

“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?

schweizer armee höhere kaderausbildung der armee militärakademie an der eth zürich the game of...

Documents

rent seeking buchanan

definition of rent seeking

armee militrakademie

eth zurich

eth zrich

design features

n committees

specific mechanism design