Public Choice94: 175–189, 1998. 175c 1998Kluwer Academic Publishers. Printed in the Netherlands.

The role of political parties: An analysis based on transactioncosts�

PHILIP JONES & JOHN HUDSONSchool of Social Sciences, University of Bath, Claverton Down, Bath, BA2 7AY, UK

Accepted 22 April 1997

Abstract. This paper explores the proposition that political parties reduce the ‘transactioncosts’ of electoral participation. Political parties provide a low cost signal of a candidate’spolicies and personal characteristics and, in this way, reduce voters’ information costs. Withreference to ‘transaction cost economics’, political parties offer an ‘implicit contract’ betweenvoters and politicians and thereby reduce the scope for opportunism by politicians. This impacton transaction costs is important in any evaluation of public policy towards political parties.

1. Introduction

A public choice evaluation of how voters behave in political processes is opento question in that it provides no explanation of the basic question of whyvoters turn out to vote (Brennan and Lomasky, 1993). Downs (1957) arguedthat the probability of changing outcomes by a vote is often minuscule, sothat the expected benefit of voting is negligible. As there are positive costsassociated with the act of voting, the net expected utility of voting is likely tobe negative so that individuals have no motive to vote. For the same reasons,positive costs of information suggest that voters have no incentive to invest ininformation and voters have been described as ‘rationally ignorant’ (Downs,1957). It is argued that the transaction costs of participating in the politicalprocess are likely to preclude involvement by individuals. However, as voterturnout is invariably high (Aldrich, 1993), the problem is to explain suchinvolvement.

High turnout rates at elections have been explained by somewhat ad hoc‘additions’ to a net expected utility formulation (e.g., otherwise completelyself-interested individuals become stricken with concern for ‘civic duty’).Such amendments appear to be introduced to ‘save’ the original analysis (forsurveys see Mueller, 1964/1989; Aldrich, 1993; and Brennan and Lomasky,

� The authors would like to acknowledge very helpful comments both from Dr. RogerEatwell and from an anonymous referee.

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1993). The analysis in this paper builds on insights by Schram and Sonnemans(1996) and Wittman (1989). Schram and Sonnemans argued that there is clearevidence, based on experimental studies, that communication enhances voterturnout. Wittman argues that political parties play a key role in this commu-nication process. He claims that the costs to voters of obtaining informationhave been exaggerated. In particular, he notes that “… the development ofparty brand names and candidate reputations reduces … the costs of infor-mation acquisition to the voters” (p. 1400) and further that as “… partiesestablish certain reputations regarding policy positions … the voter can thenvote a party line without knowledge of the particular candidates…” (p. 1400).The objective of this paper is to consider the extent to which political partiessignal information to voters. It will be argued that politicians have incentivesto belong to political parties to the extent that political parties reduce voters’transaction costs.

When candidature for political office is announced by a representative ofa particular political party, a low cost signal is supplied to voters. The signalprovides information on policy position (i.e., on the location of the candidate’spolicy along a political spectrum between left and right wing). It also providesinformation about personality traits of the candidate as the party candidate willhave been screened in a selection process for attributes that party organisersregard as important. Of course, voters are also able to acquire information fromalternative signals but the costs of utilizing additional signals may eventuallyprove prohibitive. For example, a candidate’s future behaviour may be gaugedby policy statements, but there are a vast number of domestic issues (e.g.,the economy, criminal legislation, social policy) and foreign policy issues onwhich information would be required. Assessment of personality is also likelyto be difficult. Candidates who aspire to (or occupy) high office may haveconsiderable media coverage and it is clear that assessment of personalityaffects support (e.g., Jones and Hudson, 1996b, estimate the importance ofprime ministerial personality characteristics to popularity ratings). However,less prominent political candidates may remain little more than names tovoters. Assessing policy statements and personality of political candidates isthen potentially a high cost activity.

In this paper the analysis builds on Coase’s (1937) discussion of ‘whydo firms exist?’ Coase focused on transaction costs. While it is possible toimagine markets functioning without firms (i.e., with many separate contractsgoverning each of the functions normally organized and undertaken withinfirms), market arrangements may be costly. Each stage in the firm’s produc-tion process would demand a finely negotiated contract. By comparison, thebroader contractual arrangement inherent in firms explains how firms reducetransaction costs. Scherer and Ross (1990: 109) emphasise that: “… activi-

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ties are collected in what we call a firm … when transaction costs incurredin using the price mechanism exceed the cost of organizing those activitiesthrough direct managerial controls.” In this paper the same rationale under-lies the existence of political parties; the raison d’etre again being to reducetransaction costs.

Transaction costs include: search costs; bargaining (or negotiating) costsand contract costs (i.e., the costs of making the conditions of trade clear andenforceable). The main focus of the paper is on search (and information)costs but the opportunity is also taken to consider the role of political partiesmore generally. Williamson (1975, 1985, 1986, 1990) provides a frameworkreferred to as ‘transaction costs economics’. This approach identifies moreformally the problems which cause high transaction costs in markets. Inparticular, he notes that, with bounded rationality (individuals failing to collateand compute all information because of cost considerations), asset specificityand opportunism (which is ‘self-seeking with guile’), contracts in marketswill involve exceptional transaction costs. Public choice analysis frequentlycharacterises the political process as a ‘political market’. If so, the question oftransaction costs is important. Institutions within the political process can beperceived as mechanisms to reduce transaction costs. For example, Weingastand Marshall (1988) consider the committee structure of Congress in thislight. However, other institutions play such a role and, in this paper, politicalparties are shown to offer an ‘implicit contract’ between voters and parties.

The structure of the paper is as follows. Section 2 considers voters’ informa-tion problems when evaluating alternative political candidates. It is unlikelythat any voter will access all potential signals of candidates’ policy positionsand personality (media coverage, political handouts, political debates, etc.).Instead, voters are more likely to refer to an ‘optimum’ number of signalsand, of these signals, membership of political party is a low cost and poten-tially accurate source of information. The focus of attention is on the signalselection problem facing voters when signals stochastically signal candidates’characteristics.1 In Section 3 of the paper the implications of a ‘signalling’theory for electoral participation are examined. In this section the role ofpolitical parties is assessed in terms of the defining attributes of transactioncosts economics. It is argued, for example, that not only are political partieslikely to reduce information costs (given the problem of bounded rationality),they are also likely to reduce opportunism on the part of politicians. Davisand Ferrantino (1996: 1) argue that in political markets there is a tendencyfor politicians to make exaggerated claims; “the lack of transferable prop-erty rights to political office makes lying more likely in political markets”.However, although the interests of politicians are short lived, the reputationof political parties is important for the future and party discipline helps curb

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the ‘excesses’ of politicians. The incentive to safeguard the reputation (andsignal) of the political party is more important as politicians experience assetspecificity as representatives of the political party.

2. Choosing a political representative: How much information isenough?

The voter’s choice of any candidate can be represented as the decision tochoose a candidate such that the expected satisfaction from this representativeexceeds that from any other representative, i.e.,

1Z

�1

1Z

�1

PaPaS(a; a)dada >

1Z

�1

1Z

�1

PbPbS(b; b)dbdb (1)

where:S =satisfaction of voters from a chosen candidate;

a, b =the perceived policy positions of the ath candidate and bthcandidates;

a, b =the perceived personality traits of the ath and bth candidates;

Pa, Pb=the perceived probability that the candidate’s policy positionsarea/b;

Pa, Pb=the perceived probability that the candidate’s personality traitsarea/b.

Because the policy preferences which maximize S produce an uncon-strained global maximum, Equation (1) implies that certainty with respect topolicy preferences is preferred to uncertainty. This will also be the case withrespect to personality traits if@2S/@2 < 0. Hence a voter may vote for candi-date A rather than B even though B’s expected policy position and personalityis preferred to A’s, simply because the voter feels more uncertain about B.Thus for any political candidate it is important to send as clear a signal aspossible to the voter.2 For any voter, information on both policy position andpersonality are potentially costly to access. Information on the candidate willbe stochastically signalled in newspaper articles, media assessments, politicalhandouts (or leaflets) and statements at rallies. Information on candidates canalso be gained by talking to other electors. Party membership, by itself, is alsoa signal of both the candidate’s policy position and personal characteristics.A ‘fully informed voter’, (i.e., a voter using all potential signals) would incurconsiderable transaction costs. Under bounded rationality these transactioncosts are unlikely to be incurred in full. Instead the voter will probably usea limited set of signals chosen on the basis of costs and accuracy. Choosing

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a signal or set of signals from the range of all possible signals under incom-plete information about signal efficiency and costs is similar to searching forthe least cost product under conditions of incomplete information about thespread of prices (Stigler, 1961). The optimum amount of search is determinedby equating the marginal cost of search to the marginal benefit. In the sameway, in the voting context the optimal number of signals is determined bythe marginal cost and marginal benefit of acquiring information on electoralcandidates.

The voter needs to assess candidates on a wide range of issues and person-ality traits. Our analysis will concentrate on how this is done for one of these.To begin, assume that voters are fully informed about costs and accuracy ofsignals. For each policy issue and personality trait the accuracy of the signal(Ai) is defined as the mean square signalling error:

Ai = E(Si � �)2 = �2i + �ii (2)

where� is the candidate’s true policy position on a particular issue or personalcharacteristic and Si is the level indicated by the i’th signal. The right handside of (2) is the bias (� i ) squared plus the variance (�ii ). We will assume Si�N(�+� i ,�ii ). If the signal is unbiased this will simplify to just the variance.3

The mean square signalling error has a lower bound of 0, representing com-plete accuracy, and an upper bound of infinity.

Voters choose that signal, or combination of signals, which maximizesthe net benefit of signal usage, i.e., they will choose the signal(s), s, whichdominates all other signals or signal combinations:

V(As)� Cs > V(Ak)� Ck 8k 6= s (3)

V is the value put upon signal accuracy (where it is assumed that V0 > 0and V00 < 0). We will argue that V is a direct function of the influence theindividual voter has on the outcome of the election and therefore inverselyrelated to the size of the electorate. As represents the accuracy of the s’thsignal, or signal combination. Cs represents the user cost of signal usage.

Given n signals, the most accurate combination (AS) can be expressed asan n dimensional vector of weights�:

~AS = �0S (4)

where�0 = (�1, �2, … �n) and S0 = (S1, S2, …, Sn). In the case of unbi-ased signals, or when consumers voters adjust for bias, it can be shown that

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the variance of the combined signal is minimised and hence its accuracy ismaximized when

� = (�1I)=(I0�1I) (5)

where = E(ee0) and e is the signal error vector.Equation (4) with� determined as in Equation (5) forms the mean of the

distributions for and in (1). The variance will be given by:

� = 1=(I0�1I) (6)

Given the assumptions we have made, the signalling mean and variance asdefined in Equations (5) and (6) fully define the density functions specified inEquation (1). When the signal error covariances (�ik ) are all zero (5) simplifiesthe following formula for the weight for the i’th signal.

�i = 1=�ii=nX

k=1

1=�kk (7)

and the variance in (6) simplifies to the product of the variances,��kk.We shall illustrate this with just two signals, the i’th and k’th, where the

signals are combined with differing weights. It simplifies the analysis, withoutlimiting its generality, to normalize these weights so that they sum to one.The accuracy from using two signals (Aik), with weights� and 1–�, is thenequal to:

Aik = E(Sik � �)2 = �2�2i + (1+ �)2�2

k + 2�i�k�(1� �)

+�2�ii + (1� �)2�kk + 2�(1� �)�ik

(8)

Differentiating this with respect to�, setting the resulting equation to zeroand solving for� gives us the following expression for the optimal value of�:

� =�2

k � �i�k + �kk � �ik

�2i + �2

k � 2�i�k + �ii + �kk � 2�ik(9)

This is equivalent to Equation (5). If neither signals are biased and�ik = 0,this simplifies to the ratio of the variance of the one signal to the combinedvariance of both signals as in Equation (7). If both variances are equal� willequal 0.5. It is apparent from (9) that there is always some value of� whichwill improve the efficiency of the optimal solo signal. The gain in efficiencyfrom using the k’th as well as the i’th signal, where�kk � �ii , is shown inEquation (10):

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Aik � Ai = (1� �2)�ii � (1� �)2�kk � 2�(1� �)�ik (10)

Ignoring the covariance element the greatest gain is when�kk = �ii and� =0.5. However, if the two variances differ widely then this efficiency gain willbe small. In the limit as�kk ! 1, � ! 0 and the efficiency gain in (10)approaches zero. A negative covariance increases the potential gain of theadditional signal in the same way as, when aiming at a target, an overshootand an undershoot are useful in identifying the correct distance. However, as� may lie outside the range bounded by 0 and 1 it is also possible that when�ik > 0 there is a similar efficiency gain.

Using additional signals will always increase accuracy and reduce thevariance. This does not mean, however, that it is always optimal to use anadditional signal as the additional costs of signal interpretation may outweighthe value the voter places on additional accuracy. In the case where thereare just two possible signals, both will be used if the value placed on theadditional accuracy of using both signals rather than just the optimal singlesignal exceeds the additional cost:

V[(1� �2)�ii � (1� �)2�kk � 2�(1� �)�ik ] > Cik � Ci (11)

The additional cost may equal Ck, but it is possible that there are increasingcognitive costs to the evaluation of multiple signals, in which case Cik–Ci>Ck.Alternatively the reverse is also possible. (11) is more likely to be satisfiedthe closer the two signals are in terms of accuracy. This can be generalized tothe n dimensional case as a rule which states that combinations of signals aremore likely to be employed amongst signals of similar accuracy (Jones andHudson, 1996a). In addition, the greater is V, the more likely an additionalsignal will be used. For example, if there is an inverse relationship betweenV and the size of the electorate (as the probability of changing the outcome islower) then,ceteris paribus, the number of signals used to evaluate candidateswill also be inversely proportional to the number of electors.

3. Transaction cost economics and political parties: Applications andimplications

In Section 2 of the paper the impact of political parties on voters’ informationcosts was discussed. In this section more general implications are considered.In particular, the opportunity is taken to rationalize the role of political partiesin the context of ‘transaction cost economics’.

The above analysis has formalized Wittman’s hypothesis that “… the devel-opment of party brand names and candidates reduces the costs of information

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to the voters…”. The more closely party signal is correlated with policystatements by party-affiliated political representatives, the greater will be theaccuracy of the signal. Political party may be the only signal referenced if itdominates all other signal-signal combinations (as in Equation 3) and thereis some support for this ‘strong’ version of Wittman’s hypothesis in the UK.A sample survey carried out by Audience Selection of 1200 individuals inMarch 1996 discovered that only 39% could name their Member of Parlia-ment. As most of the remaining 61% intended to vote in the next election, itis likely that such voters relied on party affiliation as the sole signal of can-didate suitability.4 Alternatively, a more general (or ‘weaker’), interpretationof Wittman’s hypothesis arises when party affiliation is used in combinationwith other signals (i.e., it is part of a signalling set which dominates all othersignals). The weight placed on party affiliation relative to other signals islikely to be determined by its accuracy alone (as described in Equations 5 and9).

A ‘signalling theory’ of political parties helps explain the historical evo-lution of political parties. In many western democracies they became impor-tant during the 19th century when the enlargement of suffrage increased theimportance of access to low cost information signals. Prior to such con-stitutional reform political candidates were typically drawn from a narrowspectrum of the community and were well known (sometimes personally, orvia friends and acquaintances) to the average voter. However, extending suf-frage increased the importance of low cost signals at a time when alternativepolitical information signals were difficult to access. Advances in technology(radio, television, etc.) have reduced the costs of accessing signals but, in thenineteenth century, as increased suffrage reduced the value of any one indi-vidual’s vote, the necessity for a low cost signal to reduce transaction costsbecame obvious if political participation were to be meaningful. Competitionbetween political candidates provided the incentive to produce such a signalvia the creation of party affiliation. Shively (1995: 197) notes:

In the United States, suffrage had been expanded earlier than in Britain,and it was in the United States, in the first decade of the nineteenth century,that the first modern parties had appeared. Similarly all over Europe,whenever a reasonably large and varied electorate was established withthe coming of democracy, the political party appeared.

Commenting on the expansion of suffrage in the UK in 1867, Ostrogorski(1964: 80) noted that “… with a widely enlarged suffrage the candidate wouldfind himself less and less able to come face to face with his constituency,…”. When candidates were expected to represent bigger constituencies withwidely different social classes, alternative political signals were required. Yet,even if the voter were only to note party affiliation (as printed on the ballot

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paper in the ballot booth), this signal would potentially convey considerableinformation if the voter knew something already about the party. In thisway, a signalling theory explains why successful political parties were oftenaffiliated to existing social or religious movements. Political sociologists notethe importance of the emergence of political parties from trade unions, churchor social class. With reference to the analysis here, the interpretation would bethat such linkage adds weight to the party affiliation signal, i.e., the signal ismore ‘productive’ and conveys greater information in the party’s early years.5

In an era in which the media has become hyper-active in disseminating polit-ical commentaries and at a time when politicians spend considerable sums ofmoney advertising their ‘message’ it might be thought that the importance ofparty signal would be reduced. However, Levitt (1994) raises some importantdoubts on the extent to which voters rely on these forms of information. Whenanalysing the impact of campaign spending on elections to the US Congress,Levitt casts doubt on the received view that campaign spending had a largepositive effect for challengers but little effect for incumbent spending. Henotes the possibility of bias from differences in the quality of candidatesand from district specific-factors (e.g., a high quality candidate may attractgreater support and have greater campaign expenditure). To correct for suchbias, Levitt compares the impact of campaign spending on the differencein votes as between the first and second contest. By restricting analysis tooccasions where the same people face each other twice, he notes that thesize of the impact of challenger campaign spending is reduced. Levitt con-cludes that “campaign spending has an extremely small impact on electionoutcomes” (p. 777) and one reason may be that much of the impact of expen-diture is cancelled by the expenditure of another rival candidate. The impactof campaign expenditure and media commentaries may be merely to create“noise”, which could increase rather than reduce uncertainty. If so, it is possi-ble that even though campaign expenditure and media commentary have bothincreased throughout the twentieth century, the signal from political partiesremains important. When the focus of attention turns to party managers thereis indeed every reason to believe that this is the case.

While the signal reduces information costs, there is also a broader sensein which political parties affect transaction costs. It has long been noted thattransaction costs can have a deleterious impact on trade. When the difficultyof foreseeing future scenarios and writing contingent contracts is acknowl-edged, opportunism causes high transaction costs and this has stimulatedimplicit institutional responses (see, in particular, Eggertsson, 1990). Whilepublic choice analysis characterized political processes as ‘political market-s’ in which there is exchange between rational-choice actors, institutionalresponses to reduce transaction costs have been largely ignored. One excep-

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tion to this rule is the analysis of Weingast and Marshall (1988) by which thecommittee structure of Congress is rationalized as a mechanism to facilitatevote trading between Congressmen. However, in similar vein, a signallingtheory of political parties provides the basis upon which such a rationalisa-tion can be built. The defining characteristics of individuals in ‘transactioncosts economics’, as described by Williamson (1975, 1985, 1986, 1990), are,first, that humans are subject to bounded rationality, whereby behaviour is‘intendedly rational, but only limitedly so’ (Simon, 1961: 34) and, second,that humans are prone to opportunism, which Williamson (1986: 177) definesas ‘self-interest-seeking with guile’. When there is a coexistence of assetspecificity, bounded rationality and opportunism, the difficulties for markettransactions are ‘catastrophic’. With bounded rationality not all contingenciescan be covered in contracts and an opportunistic move (to claim advantagefrom a situation not covered) can create greater costs when there is assetspecificity.

Williamson’ approach has been utilized to explain the role of the publicsector (e.g., Dugger, 1993). Here the focus of attention is on political partieswithin democratic processes. Dugger (1993) argues that asset specificity aris-es when a decision by a ‘buying firm’ to stop demanding a service leaves thesupplier with a substantial loss on an asset designed specifically to supply thebuyer. Politicians who join parties ‘sell’ a product which is asset specific; partof the costs of representing a party is that politicians are constrained in onlybeing able to present the package of policies (i.e., the political manifesto) ofthe party. They lose the bargaining advantage that the freedom to ‘sell’ theirsupport would give them by declaring prior to the election where that supportwill lie. The advantage they secure is the low cost signal that is conveyedbut, with asset specificity, it is essential that this signal is perceived as ‘highquality’. One indication of the continued importance of ‘political party’ isthe attention which party organizers attach to the signal. Political parties usescreening mechanisms to select candidates with fairly homogenous person-ality traits. In so doing the voter is offered considerable information withoutever hearing or meeting the political candidate. A low variance increases boththe probability that party affiliation can be used as a signal and the weightthat is given to party affiliation if this signal is used in combination with othersignals. If used, there will be a direct linkage between the variance of thesignal and the certainty with which electors evaluate the party’s candidates.Greater certainty will (via Equation 1) translate into increased electoral sup-port. It is important that representatives of political parties make consistentstatements on policy issues. It is also important that representatives presentan ‘unblemished’ public and private life. Different policy statements increase

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the variance on the signal and ‘blemished’ integrity for some representativesincreases the variance and reduces the mean of the political party signal.6

Davis and Ferrantino (1996) suggest that politicians are more likely to liebecause they have no transferable property rights to political office. However,the existence of political parties makes obvious the costs of deception for thosewho share the same ‘party label’. Thus, despite an abundance, in recent years,of low cost information (via the media) in western democracies, it remainsas important as ever to reduce the variance of the party signal. Partly as aresponse to this there has been an increase in the importance of ‘spin doctors’for major political parties. The task of the ‘spin doctor’ is to ensure thatthe media (newspapers, television, radio, etc.) transmit a clear and consistentparty signal. Via the media, the ‘political party’ signal must be made clearfor voters to increase electoral participation and party support. The morehomogenous the party and the more long standing the party the greater theelectoral advantage of the signal.

A ‘transaction costs economics’ approach to political parties highlights theimportance of this institutional structure in terms of reducing opportunismby myopic politicians. In so doing, political parties can be seen as providingan ‘implicit contract’ between voters and the political representatives of theparty. Critics see party discipline as stifling debate (political candidates beingviewed as delegates not simply as representatives) which is an aspect of assetspecificity. Also they fear that parties create barriers to entry which stifle polit-ical competition (in that independent candidates are disadvantaged). Againstthis, parties reduce voters’ information costs and, given bounded rationality,parties have an incentive to act as voters’ agents in policing disreputable (orcorrupt) behaviour. There are ‘collective benefits’ that arise from the impor-tance of reputation and party signal. Marvel and McCafferty (1984) favourresale price maintenance schemes in that they may ensure that goods withbrand names are only marketed by retailers known to have a good reputa-tion. The reputation of the retailer spills over in terms of the reputation ofthe branded product. Similarly political parties have a signalling incentive tosupport candidates that are most likely to sustain the party’s reputation.

If the role of political parties is to signal information, broader implica-tions follow and it is possible to derive testable predictions. For example, ifpolitical parties reduce signal variance (and increase its accuracy) the impor-tance of other signals (from campaign meetings etc.) are likely to be reduced.One implication is that ‘independent’ (i.e., non-party affiliated) candidateswill find it difficult to transmit information. In this context, ‘independent’candidates are more likely to enjoy greater electoral success in local (par-ticularly rural ‘village’) elections than in (large) national elections. For thelarger constituencies that characterise a general election it is likely to be more

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difficult to access local knowledge of candidates and reliance on nationalparty signal may be of greater value than would be the case in smaller local(‘parish’) constituencies, where candidates are more likely to be personallyknown. In the UK it is seldom the case that ‘purely independent’ candidatesachieve political office. Even the most obscure candidate will report him-self/herself as representing a political party (however extreme and howeversmall). Yet, there is an obvious difference between the three ‘main’ parties,Labour, Conservative and Liberal Democrats, and more narrowly focussed(or more ‘extreme’) parties. It follows that if party signal is more importantin national elections than in local elections the prospects for ‘independents’(i.e., not ‘main’ party politicians) should be worse in national than in localelections. In the 1992 local elections (for English ‘Shire’ districts) represen-tatives of the three main parties were elected to all but 6.7% of seats contested(Denver, Norris, Boughton, and Rallings, 1993). In the general (national)election of 1992 representatives of the three main parties won all but 3.7%of seats contested in the UK (Butler and Kavanagh, 1992). If comparisonis made with ‘general election success’ of representatives of the three mainparties in England then the contrast is even more stark, as, by the generalelection of 1997, all seats in England were occupied by representatives of thethree main parties.7

If party signal is a low cost information source, it would also follow thatit would have a greater impact on transaction costs for national than forlocal elections. In national elections party signals (on issues such as theeconomy, law and order, foreign policy, etc.) as transmitted by membershipof national political parties are a more common reference for individuals inall parts of the country. In local elections (where concern focusses on local,regionally-specific issues – such as the siting of a new school or local hospital,expenditure on street repairs, etc.) national political party signal is less likelyto prove as informative. If national political party creates a signal which has agreater impact in reducing transaction costs in national elections, this wouldbe one reason for expecting greater turnout in national than in local elections.Turnout in the UK 1992 general election was 77.7% (Butler and Kavanagh,1992) whereas average turnout in the 1992 English district elections was38.3% (Rallings and Thrasher, 1994).8

A signalling theory of political parties also sheds insight on internationalcomparisons. In elections in which campaign spending by individual candi-dates is greater (and is unconstrained by the constitution) the importance ofparty affiliation is likely to be reduced (as also is the importance attached toparty homogeneity). Political advertising by candidates provides an addition-al low cost (although biased) signal to the voter and, as suggested in Equations(5) and (9), the impact of party membership as a signal will be reduced. This

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suggests that constraining individual candidate spending in the US to UKlevels would increase the importance of the political party signal and create atendency for more homogenous, tightly-disciplined parties.

4. Conclusions

This paper has formalized the observation of Wittman (1989) that membershipof political parties provides low cost information to voters. The link that existsbetween political parties and the information they provide to voters can beanalysed via a theory of search. Membership of political parties is one of thesignals that voters use when attempting to estimate the ‘quality’ of politicalrepresentatives.

This theory explains the existence of political parties in terms of their impactin reducing the transactions costs inherent in democratic processes. Given thecosts of information, the signal is important to voters but, as membershipof a political party implies asset specificity, the signal is also important toeach party representative. The ‘quality’ of the signal affects each party rep-resentative and there will be self-regulation to maintain a low variance, highquality signal. In this way, political parties can be seen as a response tobounded rationality when the threat of opportunistic behaviour is magnifiedby the existence of asset specificity. Political parties offer an implicit contractwhich serves to reduce the transaction costs of participation in a political mar-ket. With reference to Williamson’s (1986: 178) ‘organizational imperative’,political parties are a means to “organize transactions so as to economize onbounded rationality while simultaneously safeguarding … against the hazardsof opportunism”.

Predictions drawn from a signalling theory have been shown to be consistentwith results that emerge in empirical appraisals of political processes. Thereis reason therefore to recognize that potential failings in democratic processcan be mitigated by the institutional structure that evolves. A signalling theoryidentifies the response of social institutions to the potential impact of the ‘free-rider problem’. Signals convey information concerning the quality of politicalcandidates; political parties are an institutional arrangement that solves theincentive problem associated with the provision of information. Each voter isfaced with the problem of accessing a range of signals in search of informationbut it is not in the interests of any one voter to invest heavily in such search asno one individual has a significant effect on electoral outcomes. All would bebetter off if the costs of search could be shared and information (a public good)provided and distributed freely. In the absence of an incentive on the part ofeach voter the political firm fills the void. The political firm has an incentiveto generate information with no ‘direct cost’ to voters. The incentive for the

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party is to make it easier for voters to select the candidates supported by theparty and for the party to win office. Whether or not political parties performthis role in a socially ‘optimal’ fashion is the subject of another paper; here itis sufficient to note that social institutions help mitigate free rider problemsin enhancing the communication process that Schram and Sonnemans (1996)argue is central to enhancing voter turnout. Moreover, in the debate as towhether or not public funds should be used to subsidise the costs of political(‘firms’) parties, their importance in providing low cost signals that reducetransactions costs of political processes cannot be ignored.

Notes

1. In contrast to the standard analysis of signalling product quality to partially informedconsumers, which is based on a game theoretic approach to non-stochastic signals.

2. This is not to say that the candidate’s interest is to provide a truthful signal. There may beareas of personality and policy that are best not transmitted to the electorate. However, forthose signals that are to be transmitted clarity of signal reduces voters’ costs of participatingin an election.

3. A variation of the model sees the individual fully cognizant of the signal bias. He/she thencorrects the signal for this bias (see Maute and Forrester, 1991) and in this case, even forbiased signals, the mean square signalling error would simplify to just the variance.

4. These results were reported inPublic Awareness Computer TablesLondon: AudienceSelection, March 1966.

5. For example, in the UK the Labour Party emerged to represent the trade unions. On birthit was clear to voters immediately where the Labour Party stood in the left-right politicalspectrum. By comparison in the 1980s the Social Democratic Party was formed by ‘rightof centre’ personalities (formerly political representatives of the Labour Party). Voterswere not clear where on the policy spectrum the party stood and it did not survive as anindependent party into the 1990s.

6. In the UK parliamentary parties adopt a system that relies on some members acting as‘Whips’. Their task is to ensure that, on important issues of policy, all party representativesare seen to support the ‘party position’. A ‘transaction cost theory of parties’ explains thisaction and also why MPs are prepared to accept the discipline of Whips. The theory predictsthat parties will lose electoral support if voters are unable to rely on the informational signalprovided by the party ‘brand name’. This would help explain the failure of the LabourParty to offer a credible opposition to the Conservative Party in the early 1980s, as theformer was experiencing widening divisions.

7. Seats won in parts of the UK outside England were won by ‘national’ or ‘regional’ parties,e.g., the Scottish National Party, Plaid Cymru, the Ulster Unionists. SeeThe Sunday Times,23 March 1997: 8–9.

8. The importance of low cost information on turnout is more significant when allowance ismade for the fact that the probability that vote is effective must be greater in smaller localelections than in bigger constituencies for national elections.

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