3.3 Economic Theory of Constitutions Flashcards Preview

xInstitutional Economics > 3.3 Economic Theory of Constitutions > Flashcards

Flashcards in 3.3 Economic Theory of Constitutions Deck (12):

Why are rules of a community or society always associated with more or less collective coercion (Zwang)? Which conditions must be fulfilled if we want to avoid such coercion?

Social rules are the rule or standard of behavior shared by members of a social group. Coercion in collective decision making occurs in many situations.

It deals with other aspects of Coercion that limits the freedom of individuals to make important marginal adjustments. Therefore, coercion is always associated with social rules and norms.

Coercion is inevitable in a democratic society as individuals interpret and react to the nature and outcome of collective decision making. People must review their preference, their behavior, and if they want to be member to a society they must accept these rules. Without these rules, we will have anarchy.

Collective coercion can be avoid through:

  1. Government regulation
  2. Cooperation and Competition
  3. Concept of Sharing


What are external effects and what are private and public goods (and club goods and common pool resources)? What do the terms “excludability” and “rivalness” mean in this context?

An external effect occurs when the actions of one economic agent directly affect (not indirectly through market prices) another economic agent.

E.e: The factory producing widgets emits a lot of pollution, making a lot of people in the neighbourhood sick (“side-effect”).

Private Goods: Are those that have the property of divisibility and excludability. That means that they can be divided and excluded. The marginal cost of providing an additional unit to another user is greater than zero.

Public Goods: These goods are not excludable and non-rival (not divisible). The marginal cost of provision is zero. Which means that the use of these goods does not decrease the goods´availability to others. Also no one can be excluded from using these goods.

Example: Earth’s atmosphere like sunlight, air, etc.

Common-property and common-pool resources: There is huge rivalry among these goods but it is difficult to exclude anyone from using these goods. They are subject to depletion which means if someone is using them, then others cannot use them.

Example: aquifers, fisheries, forests etc

Club Goods: These goods are excludable but non rivalry. These goods are excludable when it reaches the point where any new person cannot derive any benefit from those goods. Are not subjected to depletion.

Example: tennis club, brand label , cinemas, private parks, guarded beach etc.

Rivalness: Can be understood as the physical use of a good by someone in order to decrease the probability that others use the same good.

Excludability: Revers to the right to have access to the goods or ownership of the goods.

The market, which works through the excludability of goods and from their rivalness to their appropriation, it could be said that external effects are connected with added/reduce values of goods. E.g: a the water from a river may be a common-pool-resource, but if it was polluted by this company (external effect of the production process), nobody will want to use the water of this river, so due to the external effect the value of this good was altered.


Which relationship exists between the intensity of coercion felt by citizens, or the degree of freedom of manoeuvre, on the one hand and the opportunities and probability of success of exit and voice on the other hand in different types of collectives? Please explain the terms “exit”, “voice” and “loyalty” and why they are relevant in this concept?

Exit: Refers to the possibility to leave the system

Voice: Refers to the possibility to protest, to raise the voice against something that needs to change

Loyalty: A faithful adherence to a sovereign, government, leader, cause Members of any form of human group have essentially two possible responses when they perceive that the organization is demonstrating a decrease in quality or benefit to the member:

  1. they can exit (withdraw from the relationship); or,
  2. they can voice (attempt to repair or improve the relationship through communication of the complaint, grievance or proposal for change)

By understanding the relationship between exit and voice, and the interplay that loyalty has with these choices, organizations can craft the means to better address their members' concerns and issues, and thereby effect improvement. Failure to understand these competing pressures can lead to organizational decline and possible failure.

A image thumb

Private negotiations (Verhandlungslösungen) on a voluntary basis could perhaps be used to provide collective goods without collective coercion. Under what conditions are such solutions feasible and under what conditions are they not realistic?

Private negotiation is possible when have homogeneous group of people and have same interest. And it is not feasible when heterogeneous and different interests have.

Is it possible:

  • when collective goods satisfy the preferences of citizens. Decision making costs increase because it is more difficult to get agreement in heterogeneous group than in a homogeneous group. In a homogeneous group, people are less worried about collective action because no one wants to exploit themselves. They can trust that what other people think is in their self-interest will also be in themselves interest.
  • When increase the number of loyalty by providing various types of goods even through private negotiations thus decrease cost and increase benefits.
  • In some incidence the decision making cot will increase When increasing number of entries in the society. It’s easier to get agreement among 55 of 100 than among 550 of 1000. i.e. decision making costs increase in the number of people required to agree for any given decision rule. But this is not applicable if the society is homogeneous.

Is not possible (are not realistic):

  • When collective goods affect freedoms of certain people
  • when increase the number of exit because of production of that goods
  • When collective goods production follows a hidden goal by satisfying the interests of private negotiators.


Why is the economic theory of constitution (Vertragstheorie) based on constitutional calculus (Verfassungskalkülen) of individual persons? What are “costs of consensus building”, “probable external costs” and “costs of interdependence”?

Cost of census building include the cost of Avoidance cost, Transaction cost and Cost of agreement

Cost of interdependence = costs of consensus building + external costs

A image thumb

What is the optimal number of yes-votes in a collective decision on a constitutional rule as considered by an individual? Sometimes this point is more at the left side and sometimes more at the right side of the curve of interdependence costs. How do you interpret these different positions as regards the rule of decision making the individual in question prefers?

The curve of decision costs is shown to rise from left to right with an increasing share of individuals required for a collective decision.

Individuals will take into account both types of costs when they determine an optimal majority (M*).

The optimum is given where total costs are lowest.

The shapes of the external and decision-making cost curves differ according to the matter considered.

For each problem there may be a different majority that is optimal when it comes to making decisions about allocating activities as between the private and collective domains. 

For example, in the personal area (such as the kind of music ones listens) the external costs are likely to be higher because individuals probably experience a large utility loss if a collective decision is imposed. Individuals will therefore allow collective decisions in this area only provided a large majority is required. 

The optimal majority is 50% by chance only, because simple majority has no special significance as a decision-making rule with regard to the determination of the private and collective domains


What is reflected by the degree of curvature of the function of interdependence costs? What does this degree of curvature depend on?

Interdependence costs are comprised of decision-making costs and external costs.

Degree of curvature of the interdependent function reflects the external costs in the aggregate and will include both costs of inaction and costs of action. Steeper the U, the more variations in the inclusiveness of the decision rule will affect the costs of interdependence. Also it is influenced by the number of people in the group. 

For example, the more of individuals involved, the more of them have more or less similar tastes and therefore the easier to achieve a consensus. Then, the increased N shift the decision making cost curve right and downward.


For arriving at constitutional rules which are valid for all individuals in a community or society the individual calculi of consent have to be aggregated?

Which solutions to this procedure, that means the aggregation of many individual calculi of consent to one single constitution, can be thought of in a one-dimensional political arena?

What is meant by “veil of ignorance” and “renegotiation calculus” in the constitutional theory developed by Buchanan and Tullock?

Unanimous constitutional consensus: the veil of ignorance (Schleier des Nichtwissens)

The veil of ignorance blocks off the knowledge, such that one does not know what burdens and benefits of social cooperation might fall to him/her once the veil is lifted. 

Re-negotiation calculus: assumes convergent expectations (= rights) and is for this reason tautological. Transform convergent expectations into constitutional rules.


From a libertarian and individualistic point of view a constitution which is applicable to the collective as a whole can only be decided on unanimously.

Please explain why this is the case.

Unanimous constitutional consensus in case of heterogeneity of the participants in the collective is possible, if 

  • many objects of decisions, many political dimensions, 
  • which do not overlap but intersect. 

Libertarian and individualism doctrine support individual freedom, and limit the state power. John Locke believed that "law is intended to ensure not doctrines or authenticity of the plurality of opinions but the safety and security of property and community and personal integrity of every citizen".

As the Constitution is the supreme law in the state, the Constitution must be chosen unanimously by the citizens because it defends their interests and protect their freedoms.


Which solutions to the problem of constitution building are imaginable in a multi-dimensional political arena?

Why is a constitutional consensus easier achievable also in a one-dimensional political arena, if the members if the collectives are more homogenous?

Homogeneity of the participants of the collective: similar curves of interdependence costs, constitutional consensus is easy.

Multidimensional approach is applicable when the heterogeneity of the participant’s of the collective decision making exists. When the Homogeneity of the participants of the collective it shows the similar curves of interdependence costs and cost for decision making and external cost are minimum. Thus the constitutional consensus is easy.


  1. Homogeneity of the participants of the collective: similar curves of interdependence costs, constitutional consensus is easy 
  2. Heterogeneity of the participants of the collective: different curves of interdependence costs, constitutional consensus is difficult 
  3. Problem of consensus can be solved by changing from an one-dimensional to a multidimensional setting of political decision making 
  4. Decisions on several constitutional problems: an individual can simultaneously belong to the losers and to the winners. 
  5. Intra-individual instead of inter-individual conflicts: Compromises are facilitated 
  6. “The unanimous consensus on constitutional rules will be easily possible, in spite of existing contradictions of interests, if for all participants in the collective the calculation of cost and benefit including all dimensions of politics is more or less equal. In other words: if they belong to minority groups and to majority groups in a more or less equal number of cases“ (Kirsch, 1983, p. 69). 
  7. „Cross-cutting cleavages“: divisions in society (e.g.;, according to ethnic groups or economic wealth): 
  • parallel: reinforcement of social conflicts (Belgium)
  • intersection: mitigation of social conflicts (Switzerland)

8. Unanimous constitutional consensus in case of heterogeneity of the participants in the collective is possible, if - many objects of decisions, many political dimensions, - which do not overlap but intersect. 

9. In case of opposite conditions: reinforcement of dissent on constitutional rules


Why (and under what conditions) can a constitutional consensus more easily be achieved although the members of the collectives are heterogeneous if several or even numerous political dimensions are included in decision making?

Constitutional consensus is more easily achievable, when have many objects of decisions and have many political dimensions which do not overlap with each other but intersect. Each representative from political dimension represents a collectivity from heterogeneous society and it is easier to achieve constitutional consensus because they negotiate and finally decide by agreement of all members. (Intra-individual compromise = consensus)


What is meant by “cross-cutting cleavages”? Please mention a few examples and how the relationship between cross-cutting cleavages and the achievability of constitutional consensus. Why and under what conditions is it easier to arrive at a unanimous constitutional consensus if the variety of cross-cutting cleavages exists?

„Cross-cutting cleavages“:

divisions in society (e.g.;, according to ethnic groups or economic wealth): 

  • parallel: reinforcement of social conflicts (Belgium) 
  • intersection: mitigation of social conflicts (Switzerland) 

Definition: The degree groups on a first cleavage are identically distributed amongst groups on a second cleavage. 

e.g: Belgium has two fairly equal sized linguistic groups: Walloons (French) and Flemish (Dutch). 

Belgium is divided between Flemish-speaking (a version of Dutch)in the north (57%) and French-speaking Wallonia (42%) in the south - reinforcing language-regional cleavages. Belgium is over 90% Catholic (a cross-cutting cleavage) but the north is wealthier than the south (reinforcing cleavage) and a socio-linguistic/regional cleavage is so important that parties are split along regional lines creating highly fragmented party systems and great difficulty in forming stable governments. The linguistic conflict became so intense in the 70's and 80's that constitutional changes produces a decentralised federal system of government in 1993. After severe political crisis the autonomy of the three regions was strengthened even more in 2008. 

Switzerland divided by both language (German 65%, French 20% and Italian 8%) and religion (46% Catholic and 40% Protestant). All but four of the twenty-six cantons are linguistically homogeneous (a reinforcing cleavage) but the same language groups have different regional dialects (a cross-cutting cleavage), and most cantons are of mixed religion (a cross-cutting cleavage). Different language and religious groups often have the same economic interests in tourism or baking (a cross-cutting cleavage).But the most Swiss identify with their nation and the federal system is highly stable and integrated nation.