Prof. Dr. Bernhard Neumärker Summer Term 2016 Albert-Ludwigs-Universität Freiburg Constitutional Economics Exam July 28, 2016 Please write down your name or matriculation number on every sheet and sign your exam on the last sheet. You have 90 minutes to answer two of the three questions in part I (questions 1-3) and one of the questions of part II (questions 4-5). If you give an answer to all the questions in any of the two parts, your answer to the last question of the respective part will not be considered in final grading. Only writing and drawing tools are permitted. Provide concise answers. Good luck! Do not turn page before given permission!
2 Part I: Lecture 1. Why could it pay for citizens to delegate public post-constitutional decisions to the government? Assume that the only option for moving out of anarchy is the governmental organization of the Leviathan state, explain the main arguments for justifying such a powerful agent, and discuss why politicization could be the major constitutional motivation for a constraining constitution. Conclude with a statement about the appropriateness of the minimal state constitution. (2.5 points) Advantages to delegate post-constitutional decisions to government (at least 2 of the following): - Overcoming the state of nature - Solving post-constitutional free-rider problems - Exploitation of government s specific knowledge - Lower (expected) transaction costs than direct democracy (2.5 points) Main arguments to justify Leviathan: - Exploitative state is always better than state of nature. - Better to have political stability and a high degree of exploitation than to live in total chaos without any certainties. (2.5 points) Discuss politicization as the major motivation for a constraining constitution: - Actors in government have the incentive to bring usually not political issues to the political sphere as a way to influence decision-making in this kind of issues. - As one can presume that citizens want to ensure the existence of some negative rights (spheres where the government cannot intervene), one of their major worries when writing a constitution is to constrain government s behaviour, describing the limits of government s actions and the basic negative and positive rights of each citizen. (2.5 points) Statement about the appropriateness of the minimal state constitution: - The minimal state constitution is appropriated because it constrains the government behaviour and gives birth to the most basic form of state, the protective state, which guarantees that rights and contracts are enforced and ensures both an internal and an external order.
3 2. Assume that is the contract, N nature, 1 Leviathan, i the set of post-constitutional positions of the citizenry, (future) economic conditions directly identified only by Leviathan, P participation (the opposite NP is non-participation). Does, then, the following sequential contracting structure show a constitutional design problem? What kind of principal agent contract is B? Show how you identify the contractual form, and explain, thereby, the prerequisites of constitutional design sequences. In the sequence above Leviathan is identified before contracting: Argue normatively, if you accept knowledge about the Leviathan position before the constitution is designed, and develop as well as justify the constitutional contracting sequence you would like to prefer. (2 points) Does, then, the following sequential contracting structure show a constitutional design problem? - Yes, it shows the problem of adverse selection, because here there is an information asymmetry beneficial for Leviathan. Only he knows the true state of nature and that s revealed to him ex-ante. It is an adverse selection problem because leviathan may offer only contracts that are favorable for him. (1 point) What kind of principal agent contract is B? - It is a constitutional contract (3 points) Show how you identify the contractual form, and explain, thereby, the prerequisites of constitutional design sequences. - Based on the sequences and on the moves of the players it is possible to identify if the contract is a constitutional contract or a post-constitutional contract. (4 points) Argue normatively, if you accept knowledge about the Leviathan position before the constitution is designed, and develop as well as justify the constitutional contracting sequence you would like to prefer. Having the constitutional contract designed before the leviathan position is assigned and economic conditions are known is preferable because in this case the leviathan does not know he is going to be the leviathan and thus cannot misuse his knowledge to influence constitutional rules to benefit himself. Therefore the constitutional sequence I would prefer is the one where the constitutional contract comes at first.
4 3. Many approaches of normative constitutional economics build on the veil of uncertainty/ ignorance. Why is it convenient to refer to such a seemingly artificial respectively hypothetical construct? Show in a model of the utilitarian constitution how to implement the veil mathematically and discuss, thereby, the essentials of veil perfection and veil completeness. Is it normatively demanding to apply the equiprobability distribution as a general assumption for a mathematical expression of the veil? Motivate your answer! (2 points) Why the veil of uncertainty is convenient: - Because this construct enables us to think about how people would behave in a situation in which they have no knowledge about their future position in society. - Or: Using the veil it is possible to discuss choices that individuals would make on rules independently of their future position in society. (4 points) Show model: - Every constitutional decision-maker evaluates a constitutional rule z Z with the expected value of utility - z can be a combination of parameters or a function - The content of z is common knowledge - On the constitutional stage any personal position j can be expected with the same probability - Constitutional decision-makers are risk neutral (2 points) Discuss veil perfection and veil completeness: - Veil perfection concerns the fact that individuals have no information about their relative in-period position - Veil completeness concerns the fact that individuals have no information about their general economic conditions of the future - In this case the veil of uncertainty is perfect but incomplete, because they do have no information about their relative in-period position but have information on the general economic conditions of the future (see expected value) (2 points) Is it normatively demanding to apply the equiprobability distribution as a general assumption for a mathematical expression of the veil? - Yes, it is normatively demanding because we need full information about all potential positions in the future and also the overall assignment of probabilities, which is a difficult information to get.
5 Part II: Tutorial 4. The Calculus of Consent by Buchanan and Tullock provides an important line of argument for the analysis of political institutions from a contractarian perspective. First, explain the rationale behind the Calculus of Consent. Which costs does it weight? Second, analyse the simple majority rule (50%+1) applied for the Brexit referendum using the Calculus of Consent perspective. If UK citizens would have the opportunity to change the majority rule for this kind of decision, do you think they would change it for a qualified majority rule (2/3)? Why or why not? Which would be the pros and cons of such a change? Which are the constitutional and post-constitutional stages in this example? (3 points) Explain the rationale behind the calculus of consent : - Weighting costs of exclusion (people not satisfied with the decision) and costs of making decisions (e.g. time for the decision to be made). Weigh the costs of political institutions in a CC to find the optimal rules for collective decisionmaking. Preferred rue will not be uniform over all ranges of potential political action. (2 points) Analyse Brexit s majority rule from CC perspective (3 points) Would they change the majority rule? + Justification with pros and cons (2 points) Constitutional stage: discussing the majority rule for this kind of decision. Postconstitutional stage: voting for the referendum (making this kind of decision).
6 5. The field of Constitutional Economics is divided in two branches, the positive and normative one. Please characterize each of them. Concerning democratic constitutions, please describe two institutional arrangements that can contribute to the implementation of a democratic order and explain why they may be effective. Define the meaning of a democratic order from Buchanan s perspective. When we observe the political systems of many democratic countries, a struggle can be identified for these systems to overcome the predominance of interest groups from previous regimes. Cite and explain two factors that are crucial for the feasibility of reforms and discuss how they deal with the aforementioned problem. (2 points) Positive branch analyses how rules are made (emergence and modification) and their effects on economic activities and outcomes. Normative branch analyses if rules are the result of consent among citizens (legitimizes the state and its most basic rules. Could the observed rules have emerged from unanimous agreement?). (3 points) 1 Describe two institutional arrangements. Examples: - Horizontal separation of powers (executive, legislative, judiciary) - Vertical separation of powers (federalism) - DD mechanisms as referendums and initiatives - Basic rights (negative and positive) (2 points) Democracy according to Buchanan: a system where citizens are able to influence the political decision making (have potential access to participation in decision structures, equal weights for all). The existence of election does not necessarily mean that the order is democratic. (3 points) 2 Examples of factors that a crucial for reforms + explanation how they deal with the problem of the predominance of interest groups from previous regimes: - Incentive compatibility - Participation constraint for veto-players - Crisis = window of opportunity?! - Type of policy problem 1 0,5 point for citing one arrangement and 1,0 for the explanation. 2 0,5 point for citing one factor and 1,0 for the explanation.