Table Of ContentPoliticians, Legislation,
and the Economy
ROCHESTER STUDIES IN ECONOMICS
AND POLICY ISSUES
Other titles in the series:
Economics and Social Institutions, edited by Karl Brunner
The Great Depression Revisited, edited by Karl Brunner
Published in cooperation with
The Center for Research in Government
Policy & Business
Graduate School of Management
University of Rochester
Rochester, New York
POLITICIANS, LEGISLATION,
AND THE ECONOMY
An Inquiry into the Interest-Group Theory of
Government
ROBERT E. MCCORMICK
Graduate School of Management
University of Rochester
ROBERT D. TOLLISON
Center for Study of Public Choice
Virginia Polytechnic Institute
and State University
MARTINUS NIJHOFF PUBLISHING
BOSTON/THE HAGUE/LONDON
DISTRIBUTORS FOR NORTH AMERICA:
Martinus Nijhoff Publishing
Kluwer Boston, Inc.
190 Old Derby Street
Hingham, Massachusetts 02043, U.S.A.
DISTRIBUTORS OUTSIDE NORTH AMERICA:
Kluwer Academic Publishers Group
Distribution Centre
P.O. Box 322
3300 AH Dordrecht, The Netherlands
Library of Congress Cataloging in Publication Data
McCormick, Robert E. 1946-
Politicians, legislation, and the economy.
(Rochester studies in economics and policy issues; 3)
Includes index.
I. Pressure groups. 2. Income distribution.
I. Tollison, Robert D., joint author. II. Title. III. Series.
JF529.M316 322.4'3 80-25941
ISBN-13: 978-94-009-8155-3 e-ISBN-13: 978-94-009-8153-9
001: 10.1007/978-94-009-8153-9
Copyright © 1981 by University of Rochester Center for Research in Government
Policy and Business
No part of this book may be reproduced in any form by print, photoprint, microfilm,
or any other means without written permission from the publisher.
To Jenny and Anna
CONTENTS
Preface ix
1 ANALYZING GOVERNMENT 1
Two Approaches to Analyzing Government 3
The Interest-Group Theory of Government 7
Plan of the Study 12
Notes 13
2 QUESTIONS TO BE ANSWERED 15
Wealth Transfers and Organization Costs 16
The "Market" for Wealth Transfers 18
What This Analysis Is Not About 22
What This Analysis Is About 23
Summary 25
Appendix: Heterogeneity Begets Wealth Redistribution 25
n
N~s
vii
Vlll CONTENTS
3 THE DEMAND AND SUPPLY OF WEALTH
TRANSFERS 29
Maximizing the Returns from Legislation in a Bicameral
Vote Market 30
Empirical Evidence from State Legislatures 45
Summary 55
Notes 57
4 LEGISLATURES AS WAGE CARTELS 61
Theory and Preliminary Implications 63
A Test of Relative Wage Implications 70
Wage Pay and Malfeasance 75
Summary 75
Notes 76
5 THE OUTSIDE EARNINGS OF POLITICIANS 79
The Market for Legislators 81
Empirical Evidence from State Legislatures 86
Low Wage Pay as an Entry Barrier in Politics 96
Summary 97
Notes 97
6 THE SUPPLY OF MAJORITY LEADERSHIP 101
Competition for Majority Leadership 102
Empirical Evidence from State Legislatures 108
Summary III
Notes III
7 THE DETERMINANTS OF EXECUTIVE BRANCH
COMPENSA TION 113
Gubernatorial Compensation 114
The Question of Malfeasance 119
Summary 120
Notes 120
8 SUMMARY, CONCLUSIONS, AND FUTURE
DIRECTIONS 123
Notes 128
Name Index 131
SUbject Index 133
2
QUESTIONS TO BE ANSWERED
The interest-group theory of government is based upon the premise
that a major portion of governmental activity is devoted to the transfer
of resources among citizens. Some citizens are net winners in this
process and some are net losers. Moreover, the wealth-transfer pro
cess is not a simple process in which well-organized and wealthy
producers increase their wealth through legislation at the expense of
widely dispersed and poorly organized consumers. The more generally
correct characterization of the wealth-transfer process does not pit
consumers against producers but allows each economic unit to seek
transfers from the other units in the economy-polity. Our primary
interest in this process will be to analyze the role of the political
representative in broke ring transfers among the various groups in a
society.
In one sense the political middleman is analogous to his counterpart
in a private setting. Politicians get paid for pairing suppliers and de
manders of wealth transfers, that is, for reducing information costs in
the market for wealth transfers. However, unlike many of their private
sector counterparts (e.g., agricultural middlemen), the process of entry
15
16 CHAPTER 2
into the occupation of political representation is not "free." Indeed,
entry into the market for political representation is governed by rela
tively strict constitutional rules; for example, successful entry requires
approval by a simple majority or plurality of voters.!
Entry barriers in politics must be interpreted cautiously, however.
There are a large number of people who compete to become political
middlemen, and as we shall see, there are distinct advantages from
this competition.2 The interesting questions from our point of view
concern how elements of political competition are manifested in polit
ical behavior and, moreover, what are the positive economic expla
nations of competitive and noncompetitive outcomes in the market for
political brokers of wealth transfers.
WEALTH TRANSFERS AND ORGANIZATION COSTS
A discussion of wealth transfers by a representative government must
be predicated on the existence of certain information and transaction
costs. Without the existence of such costs wealth would never be
willingly given up by an individual unless such a transfer were Pareto
superior in nature - that is, in a costless world all equilibrium states
will be Pareto-optimal, and only welfare-enhancing transfers would be
enacted by political representatives. When positive (and differential)
information and transaction costs exist, some groups will be able to
organize and acquire information more cheaply than others, and these
differences among groups will give rise to a demand and supply of
wealth redistributions (see the Appendix to this chapter for further
discussion of this point). Consider some of the implications of these
costs for our analysis.
No Pareto-inferior policies will be adopted where a unanimity rule
governs political decisions and voting is costless. As we move away
from this idealized setting toward a world of costly voting, transfer
seeking activities will become more prevalent. Some voters may even
shirk and allow some of their wealth to be taken away under a unan
imity rule if the costs of voting exceed the benefits. Majority rule will
raise the amount of transfer-seeking because it lowers the costs of
influencing collective decisions. As we stressed above, however, the
key to understanding transfer seeking lies in the costly voting side of
the problem - namely, What is the nature of the information and
QUESTIONS TO BE ANSWERED 17
organization costs facing voters to effect a political decision in a
majority-rule regime?
The individual faces basically two types of information costs in
transfer seeking: He must discover the effects of an issue on his
personal wealth, and he must identify other individuals who will join
him on the issue. Several possibilities are relevant in this regard: (I)
The winners and losers on an issue are well identified and know who
each other are; (2) the winners and losers are not easily identified,
either to themselves or to each other; (3) obviously, winners can be
easily identified while losers cannot, and conversely. The positive
implication that follows from this taxonomy of information costs is the
well-known result that more wealth transfers are expected in a cate
gory such as (3). Political brokers will have incentives to search for
this type of issue, which in general represents the traditional model of
well..organized groups gaining transfers at the expense of the general
polity. In this case the winners are easily identified, and the losers
poorly identified. Moreover, the losers may lose on an issue only in
an opportunity cost sense (for example, the value of deregulation),
they may find the benefits of deregulation hard to predict, and they
may find it not worthwhile on an individual basis to invest in procuring
deregulation.
A second general point about organization costs is that these costs
are like start-up costs. Once they are borne, they do not affect marginal
costs (though if the "firm" is to survive, they must be borne over
time). Groups that have already borne these start-up costs, for reasons
unrelated to lobbying, will have a comparative advantage in seeking
transfers and will therefore be more successful in procuring transfers
as a result. This is simply a point about jointness in production. Some
groups will be able to produce political lobbying as a by-product of
performing some other function, thereby avoiding start-up costs for
lobbying. There are many examples of such groups in the economy,
among which are labor unions, trade associations, corporations, and
the like.3
In addition to organization and information costs there is another
category of costs related to our analysis that are due to the potential
for individuals to "free ride" on the costly lobbying efforts of others.
Within each of the (2n - l) coalitions in our theory (see note 5), there
is a cost associated with collective action, and anyone participant
may receive some of the benefits of collective action without bearing
