James M. Buchanan and Liberal Political Economy by Richard E. Wagner

Author:Richard E. Wagner
Language: eng
Format: epub
Tags: undefined
Publisher: Lexington Books, a division of Rowman & Littlefield Publishers, Inc.
Published: 2012-03-04T16:00:00+00:00

Attenuated Property Rights and

Strategic Interaction

Buchanan (1950) was concerned with interaction among units of government within a federal system, and the ability of that interaction to undermine the promise of a competitive federal system. Jonathan Rodden (2006) explored similar problems that arise because of the attenuated character of ownership rights within governmental entities. At base, a federal government faces less competitive pressure than do the individual states which must attract residents in the presence of competition from other states. A competitive system of local governments will generate spillover effects among the entities. It is an easy act of imagination to describe how a higher-level government could act to internalize those spillovers. Doing this is standard welfare economics where knowledge is presumed to be complete and motivation is pristine pure.

The situation is different once reality is confronted. Knowledge is invariably far from complete. People, moreover, respond to the incentives they confront within their situations. One can characterize a system of local governments as a form of competitive equilibrium, and yet the institutional differences between private ordering with its residual claimancy and public ordering with its absence of residual claimancy can be a significant source of difference in comparative performance properties. Some units of local government might become heavily indebted and perhaps even enter bankruptcy. This situation happens to private businesses as well. Insolvency and bankruptcy play out differently for governments than for private individuals, due to the attenuation of property rights within governments, as Moberg and Wagner (2014) explain.

Differences in institutional frameworks between firms and governments generate significant differences in both the causes and consequences of insolvency. Within a regime of private law, insolvency is a problem for those creditors alone, and the principles of private ordering generally operate to concentrate liability for choices on those who make them. It is different with public ordering. Normally, governments act within some scheme of common ownership where liability for entering insolvent states is diffused in large measure among property owners within a jurisdiction. A private executive who supports a project that turns out badly will generally bear cost in a way that a public executive does not. In large measure, this is because residual claimacy makes it relatively easy to know when a project turns out badly. By contrast, this determination is not so simple to make under public ownership where enterprises have no market value.

One can imagine a system of governments held together in contractual fashion along the image of a network of hotels, as originally sketched by Spencer MacCallum (1970). Hotels offer a tied package of commonly available and privately organized services and activities. While most hotels have small territorial footprints, there is no necessity that those footprints must be small. A network of hotels, moreover, could be organized as a federation, perhaps as a form of city state with both urban centers and hinterlands. Within this organizational scheme, a higher-level government would handle matters of common interest, and would have a governing structure that aims at maximizing the value of the constituent units.

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