Political property rights and governance outcomes: a theory of the corporate polity.

Author:Salter, Alexander William
  1. Introduction

    This paper develops a theory of incentive alignment in formal governance institutions based on the structure of political property rights. It also explores how this structure affects the quality of governance as perceived by a representative polity dweller. By combining factor mobility (Tiebout 1956) with well-aligned political property rights, I arrive at a powerful incentive-alignment mechanism for rulers. I define a political property right as one that guarantees an individual or a group the right to participate in political decisionmaking and a claim to the revenues generated therefrom (see, e.g., Salter 2014). Differing political property rights structures incentivize differing governance strategies, as implicitly shown by rational choice analyses of political structures (see, e.g., Buchanan and Tullock 1962; Tarko 2014). The framework I develop will ultimately be oriented toward increasing the intelligibility of governance institutions, but it is still consistent with standard methodological practice (e.g., Friedman 1953) provided that an appropriately broad conception of prediction is adopted.

    Similar to Olson (1993), I will classify the state as a corporate body, and specifically as a corporation in the "business" of maximizing appropriable rents. While the Weberian definition of a state is mostly satisfactory for my purposes, I alter the definition slightly to consider the behavior of an organization (whether executive-dominated or council-dominated) that is sovereign, in that it is de facto the final enforcer of the specific sets of rights-claims within its purview (see, e.g., Salter 2015b). Considered this way, there is always a sovereign; the issue lies in specifying the range of rights over which the sovereign claims authority. This focuses the analysis squarely on the underlying property rights arrangement, which again is the institutional structure determining how rational agents will behave. Some property rights arrangements will cause agents to behave in a manner conducive to widespread flourishing: they will protect subjects' property rights and engage in some collective goods provision. However, other property rights arrangements will cause agents to behave in a manner that results in widespread malaise: they will prey on subjects and promote rent-seeking behavior. In both cases, agents with political property rights will act according to their own self-interest--that is, engage in wealth-maximizing behavior. Whether this behavior results in the "productive state" or the "predatory state" (Buchanan 1975) depends on whether the incentives afforded by the political property rights structure result in harmony or a conflict of interest with the public at large. (1) The interests of subjects must be evaluated with respect to their preferences, but these preferences must be confronted with real trade-offs. The desire for goods and services provided by holders of political property rights cannot be considered without reference to these trade-offs. Choice divorced from cost is meaningless (Buchanan 1969).

    In addition to the work already cited, my framework contributes to two related literatures. The first focuses on "inclusive" governance institutions and their effects on social, political, and economic outcomes (see, e.g., Acemoglu and Robinson 2005, 2012; North, Wallis, and Weingast 2009). The main theme running throughout these works is that by expanding the inclusiveness of political decision-making processes, elites' propensity to use and promote governance institutions that benefit themselves at the expense of the public at large are curtailed. However, what is less often emphasized is that there is such a thing as excessive inclusiveness--the point at which, because there are so many political decision-makers, each individual decision-maker rationally refrains from acquiring information that can improve the quality of political decision-making. This excessive inclusiveness also can result in the capture of political processes by groups that use political machinery to benefit themselves at the expense of the public, due to concentrated benefits, dispersed costs mechanisms. These mechanisms probably explain why a recent meta-study of the empirical literature on democracy and growth (Doucouliagos and Ulubajoglu 2008) failed to find a clear relationship. A corporate polity, in order to govern in a (social) wealth-maximizing manner, and thus in the interests of subjects as well as rulers, must discover a way of navigating the trade-offs associated with the inclusiveness of political decision-making.

    The second literature studies private governance (Anderson and Moroni 2014; Beito, Gordon, and Tabarrok 2004; Leeson 2014; Salter and Hall 2014; Salter and Hebert 2014; Stringham 2015; see also Powell and Stringham 2009, and the references therein). I contribute to this literature by further drawing out the structure of political property rights that will result in wealth-producing governance. Private governance solutions to social problems typically involve both residual claimancy and jurisdictional competition as responsibility mechanisms, which also are important in the generation of governance-relevant feedback concerning the efficacy of a given governance strategy. My analysis of political property rights also makes use of these mechanisms.

    I organize the remainder of the paper as follows. Section 2 discusses the foundational concepts on which my economic analysis of the corporate polity relies. Section 3 uses these concepts to highlight important features of the underlying political property rights structure, drawing support from two case studies and a related literature. Section 4 discusses issues of scope and scale that will influence the structure of the corporate polity. Section 5 concludes by discussing the analysis in light of future trends in global governance, with special attention on how changing decision-making costs, relative to other costs, influence the makeup of the optimal corporate polity.

  2. Prices, Politics, and Predation--Peculiarities of the Corporate Polity

    The conception of the state as a corporation--albeit an unusual one--is commensurate with Wagner's (2016) analysis of politics as a peculiar kind of business. Politics is exchange (Buchanan 1987, section 4), but the peculiarities of political exchange must be explored in order to understand the implications of political bargains on social wealth. One of these features is that political bargainers and entrepreneurs frequently engage in exchanges that impose on third parties obligations to which they did not consent. Varying slightly the themes of Podemska-Mikluch and Wagner (2013), market exchange is dyadic; the "ideal type" of market trade is two parties engaging in a mutually preferred exchange of property rights. In contrast, the ideal type of political exchange is triadic; it involves unwilling third parties who are coerced into the exchange and who serve as the source of the gains between the main parties to political exchange. In this scheme, the political analog of market prices are tax prices. Market prices emerge as the outcome of voluntary trades of private output; tax prices emerge as the outcome of voluntary and involuntary trades of public output (Eusepi and Wagner 2013). Thus, the political pricing process possesses some aspects that are fundamentally predatory.

    The key feature driving this result is the political commons, as exists in modern democratic polities (Wagner 2007, 2012b, 2016). In the political realm, the tax base is a common pool resource, the use of which no political actor has an incentive to economize. While elections do offer some constraint, their ability to discipline political actors is greatly vitiated by familiar public choice problems such as rational ignorance. This weak constraint provides a corridor within which holders of political property rights can use these rights to stake claims to the economy's social product (Salter 2014, pp. 15-19). (2) Even when political property rights holders in this environment cater to constituents, they have an incentive to do so by providing local benefits, the costs of which are borne by nonconstituents. In this case, the incentives afforded by the environment of state-as-commons direct political actors to advance their self-interest through creating exchange relationships that, while privately beneficial to the actor and his direct counterparties, are globally costly for society at large. The bottom line of Governance, Inc., and thus that of political property rights holders, is best served by productive governance only up to a point, beyond which predatory governance is preferred at the margin.

    Another example of how the corporate polity differs from a traditional business organization is with respect to internal harmony of interest. Firms are typically modeled as profit maximizers. Despite the information and incentive frictions that exist within firms, such as principal-agent problems, that need to be overcome to meet this goal, it is reasonable to reduce the goal of those who make up the firm to a single maximand. A single objective function is appropriate, since the firm is an institution for joint production to achieve a shared goal. Reducing the goals of those who make up the corporate polity to a single value function is not reasonable, however. This is not to say that political property rights holders do not seek to maximize appropriable rents. It is to say that political property rights holders, in seeking to maximize appropriable rents, can and do find that their plans are not mutually consistent. A harmony of interests cannot be assumed to exist within the corporate polity. In Hayek's (1973) terminology, the corporate polity is an order (cosmos), but not an organization (taxis). This, too, is a function of the underlying property rights arrangements. That holders of political property rights often find...

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