UD-10

Our models in Chapter Nine showed that simple-majority collective decisions in the case of a single public good under direct democracy are practically always inefficient. Collectively-decided tax-sharing schemes would practically never lead the median voter to choose the optimal amount of the public good. Both the distribution of preferences among voters and income distribution virtually assure that there is inefficiency in the economist's sense of the term. In addition, there is likely to be voter dissatisfaction with the outcome. Finally, we showed that majority-rule, collective decision-making can cause goods to be supplied even though some people, possibly even a majority, are harmed by the financing arrangement. And we may judge that the harm is greater than the benefit. A supra-majority rule would seem to result in fewer harmful decisions. However, such a rule would lead to greater negotiation and, therefore, to additional collective decision-making costs.

Let us now take the next step. Assume that a simple majority in a direct democracy does not choose the theoretically efficient quantity of the pure public good. If members of the collective expect this to happen, could they make any adjustments that would reduce the inefficiency? Economics teaches an important lesson about such situations. It is that inefficiency implies that there are potential gains from trade. And when there are potential gains from trade, people try to make the trades that they expect to remove the inefficiency.

Consider the position of the median voter, as described in the models of Chapters Eight and Nine. His vote decides how much of the good will be supplied. Suppose that he changes his vote. Then a different voter would be the median voter and the amount of the public good chosen by the collective would be slightly higher or lower. From the median voter's viewpoint, this is undesirable. However, under ordinary circumstances, his loss would not be very much. Now consider the viewpoints of some other voters who want a much larger or much smaller amount of the public good. To some of these, a small change in the quantity of the public good supplied may be very valuable. More importantly, there are likely to be many people who would gain from such a switch. Under the circumstances, the gainers would have an incentive to buy the median voter's vote. Suppose that the quantity preferred by the median voter's is inefficiently low. Then the vote buying by individuals who preferred a larger quantity would cause the quantity chosen by majority vote to become more efficient. Of course, many people are also likely to lose from a change in the median voter's vote. Prospective losers would have an incentive to block such trades, perhaps by making counter offers to the median voter or to other voters.

Vote buying by high-demand voters may also lead to inefficiency. This would be the case if the quantity preferred by the median voter was already inefficiently large.

All democracies have laws against buying and selling votes. In general elections, such laws may seem unnecessary because of the secret ballot.

Why would A buy B's promise to vote if he could not verify that B would keep his promise? If there are laws against vote-buying, how can our analysis be relevant to real democracies? The answer is that although individuals in mature democracies have no incentive to buy the votes of ordinary voters, they do have an incentive to buy the votes of their representatives. We saw in Chapter Four that voters make few decisions about laws directly. They divide themselves into voting districts and delegate their decision-making to elected representatives who make up the legislature. In the legislature, there is no secret ballot because voters want to know how their elected representatives vote.

Logrolling: the trade by a legislator of a vote on one issue for another legislator's vote on a different issue.

A legislator's vote is valuable because it can be used to influence legislation. There are two ways that a legislator may influence legislation: this to occur: (1) by voting for a bill and (2) by trading her votes on some bills for other legislators’ votes on other bills. The first way is straightforward and direct; the second is indirect. In the second way, the legislator barters her vote on other laws for other legislators' votes on the law in question. Bartering of votes in the legislature is called logrolling. Thus, vote buying consists of some outsider paying money or providing some service

to a legislator in exchange for his promise to use his vote to influence legislation.

If there were no laws against outright, or direct, selling of legislators' votes, we would expect the legislators to get very rich. However, citizens ordinarily outlaw this, although the strength and enforcement of anti-vote-buying laws differ in different countries. However, citizens cannot prevent the indirect selling of votes. We saw in Chapter Eight that campaign contributions can help a candidate get elected. People who stand to gain from a vote may be able to influence legislation by contributing money or services to a legislator's reelection campaign or to her political party.

The purpose of this chapter is to use some simple examples to demonstrate the incentive to buy and sell votes and to show the outcome of vote trading. The easiest way to introduce the subject is to assume a direct democracy and an open (i.e., non-secret) ballot. After we understand the incentive to trade votes in this situation, we will be in a better position to understand legislative logrolling and other actions that influence votes in the legislatures of everyday life.

Part two shows the incentive to trade votes in a direct democracy. It begins with a three-person case to show that vote trading may either increase or decrease efficiency. Then it expands to a many-person case in order to show the role of transactions costs in helping to determine the outcome of vote trading. Part three uses a more conventional demand-supply, public goods model to discuss the efficiency issue. Part four applies the ideas learned in the earlier parts to vote buying and logrolling in the legislature. Part five discusses vote-buying in new democracies that have been started in countries that previously followed a traditional patronage system.

Let us begin with the simplest possible case of vote-buying and selling. This is the case of a vote on a single issue. To show the full incentive, we assume a direct democracy with a non-secret ballot and no law against vote-buying. We first show the incentive to buy and sell in a simple three-person case. Then we shift to a model with many voters.

Suppose that a collective of three people -- A, B, and C -- must decide whether to build a dam or not to build a dam. Suppose that the dam costs $300 and that they have decided on an equal-sharing rule. Each must pay $100. The benefit to A is $102, the benefit to B is $101, and the benefit to C is $1. Thus, building the dam is inefficient. It results in a net loss of $96 ($300 - $102 -$101 - $1). Under majority rule without vote-buying, the dam would be built since the median voter, B, would vote to build it.

The inefficiency could easily be removed by vote-buying. It would only be necessary for C to buy B's vote. Since C is willing to pay as much as $99 and B is willing to accept as little as $1, such a trade is possible. A could compete with C in an effort to persuade B to vote for the project; but he would only be willing to offer B up to $2.

We can use a similar example to show that vote trading may decrease efficiency. Assume as before that there is an equal-sharing rule and that the cost of the project is $300. This time, however, suppose that the project yields a benefit to A of $201, a benefit to B of $2, and a benefit to C of $1. Under majority rule, the project would not be passed since the median voter, B, would vote against it. This decision could be changed, however, if A and B can agree to a trade. A is willing to pay B up to $101 for his vote and B is willing to accept a minimum of $98. Suppose that they agree on a price of $100. Then the project would be carried out even though it yields a net loss of $96. There would be inefficiency.

When the number of voters is small, vote buying and selling are likely to eliminate most of the inefficiency of majority rule legislative decision-making in a direct democracy because the costs of making transactions are low.

When the costs of making transactions are small, an inefficient outcome like the one in this example seems unreasonable. In the example, C could easily outbid A for B's vote. He would be willing to pay as much as $99. Assuming that B already has an offer of $100 from A to vote for the dam, B would be willing to accept as little as $2 to vote against the dam. Thus, although inefficiency is a possible outcome in the three-person example, it is unlikely. A would presumably realize that if he offered to bid for B's vote, C could bid a higher amount. So A would not waste his energy. But the situation is different if there is a large number of people.

To deal with the large numbers case, we must have some way of aggregating the separate gains and losses of different voters. Economists have done this by developing a model of public goods efficiency like the one in figure 9-1. Figure 10-1 expands that model to a case of many people. In figure 10-1, the efficient amount of the public good is q*, the point at which ΣD = MC. As in the earlier model, we assume that the costs are constant and that there is an equal-sharing rule.

Suppose that simple majority rule results in the choice of the inefficiently smaller quantity q₁. If one more unit was produced, the sum of the benefits (ΣD) would be approximately equal to the distance aq₁.

The additional cost (MC) of producing the unit is lower at 0c, or dq₁. As you will recall from our earlier discussion in Chapter Nine of the meaning of efficiency, this inefficiency could be partly removed by shifting resources away from the other uses and into the production of one more unit of this public good. Producing one more unit would yield a "social gain" of approximately ad.

This gain cannot be achieved through ordinary majority voting because the beneficiaries of such a shift are in the minority. (Remember that for q₁to be chosen, it must be preferred by the median voter. Thus the number of voters who prefer more equals the number who prefer less.) However, it could be achieved through vote-buying and selling.

Figure 10-1

INCREASING EFFICIENCY THROUGH VOTE BUYING

Since ΣD > MC at q₁, we know that, in terms of money, the voters who prefer a larger quantity have stronger demands. In terms of money, they would benefit more from an increase in quantity than those who prefer a smaller quantity would lose. Thus, we know that all of the gainers from an increase in quantity could more than compensate all of the losers for their losses. Of course, it is not necessary to compensate all of them. It is sufficient to pay off only enough to gain a majority. To cause an increase of the public good by only one unit, it may only be necessary to pay off the median voter.

To expand our example, let us now consider the possibility of buying votes in order to increase the quantity to q₃. q₃ is not the most efficient quantity but it is more efficient than q₁. To understand the gainers and losers of this shift, it is useful to divide voters into two groups. The first consists of those who prefer q₁ or more at the predetermined tax rate; we call them group A. The second consists of those who prefer less than q₁; we call them group B. The numbers of people in group A and group B are equal.

Now consider the gains and losses that would result from a shift to q₃. Each member of group B would lose. Some members of A would also lose, because some prefer q₁ over q₃. However, as a group they gain. Their gain as a group is greater than the loss to the members of group B. The graph shows us by exactly how much more the members of A gain than the members of B lose. It is the area of the darkened quadrangle abed. This is the gain in consumers’ surplus.

This logic demonstrates that the people who gain from a shift to q₃ would benefit enough to compensate all the losers. They could compensate all members of group B and also all the members of group A who prefer q₁.

Consider a simple example. We begin by dividing group A into two parts, A₁ and A₂. A₁ consists of those members of group A who prefer q₃ over q₁. A₂ consists of members who prefer q₁ over q₃. Suppose that the area of the quadrangle abde is $1,000. This means that if the quantity supplied was raised to q₃ at a cost of MC per unit under an equal sharing agreement, the gross gain would be $1,000.

Now we know that all the members of group B will lose from the shift. Let's assume that their loss is $600. Since the gross gain to groups A and is $1,000, this implies that the gross gain to the members of only group A must be $1,600.

As we mentioned, some members of group A will lose because the prefer q₁ to q₃. Specifically, the members of A₂ will lose. Assume that the members of A₂ lose a collective amount of $200. Then the gains to the members of A₁ must be $1,800.

Suppose now that the members of group A₁try to change the vote from q₁ to q₃. They would have to pay off a number of people equal to the number of members in group A₂ plus 1. Obviously, they would have plenty of money to do this. Their gain would be $1,800. Yet the total loss to all of the losers from the shift is only $800. Since they could pay off everyone in this set of people, they could surely pay off a subset.

If they only tried to pay off some of the members, they might face a bidding competition from those who would lose. However, they would surely win.

We can apply this reasoning to additional units beyond q₃. Starting at q₃, imagine that the same process of bidding occurs again. It would again shift the quantity chosen by the median voter to the right. For each successive unit up to q*, the price that could be bid for a middle-demand voter's vote by those who prefer a higher quantity would be greater than the price that could be bid by those who prefer not to have a higher quantity. Only when the quantity q* is reached would the amounts that both groups are willing to bid balance out.

When the number of voters is large, vote buying and selling can theoretically eliminate the inefficiency of majority rule legislative decision-making in a direct democracy if there are no costs of making transactions.

We could apply similar but reverse reasoning to a quantity that is larger than q*, say q₂, in figure 10-1. If the median voter prefers q₂ in a simple majority vote without vote trading, the majority vote outcome would be q₂. Then, in a costless bidding process, voters who preferred a lower quantity could outbid high-quantity voters for the votes of middle-quantity voters, the result being a shift to a lower quantity. Thus, we say that a tendency exists on these grounds for the buying and selling of votes to reduce inefficiency due to majority democratic collective decision-making.

So far we have assumed that there are no costs associated with exchanging votes. Let us now consider these costs. Suppose that you are a member of group A₁. If you set out by yourself to buy a vote, your gain would only be a small portion of the total gain to all the members. Yet you would have to pay the full cost. The problem is that the act of buying a vote is a public good. As a result there is a free rider problem.

To solve the free rider problem, the members of group A₁ would have to join together in a collective and negotiate a sharing agreement. Let us consider the costs of reaching such an agreement. To completely solve the problem, someone would have to propose a meeting. Then the members would have to attend, discuss the free rider problem, and agree to each contribute some amount to a vote-buying fund. The fund would be used to pay members of B and/or A₂ to change their votes. Suppose that one of the attendees refuses to contribute. Then the burden of paying would fall on other members. Experience and intuition suggest that an agreement may not be reached. Moreover, if an agreement is reached, the agreeing parties will have had to incur substantial transactions costs.

Actually, there are five kinds of transactions costs in this case. The first is (1) the costs to members of A₁ of reaching agreement. The second and third consist of the costs of completing the transaction with the vote sellers. The vote sellers must be located and paid. Since the sellers may want to bargain for a higher price than the members of A₁ want to pay, there may also be costs of negotiating with sellers. Thus, the second and third types of transaction costs are, respectively, (2) costs of finding vote sellers and (3) costs of negotiating. Typically an agent would be selected to do this. The fourth kind of costs are (4) monitoring costs. They consist of the value of the resources that must be employed to assure that vote sellers keep their side of the bargain. Agents are likely to be hired for this monitoring job also. Finally, if vote sellers or agents violate their

Five Kinds of Transactions Costs in Buying Votes

1. Costs to the buyers of reaching an agreement

2. Costs of finding vote sellers

3. Costs of negotiating

4. Costs of monitoring the sellers

5. Costs of enforcing the agreement against a

defaulting seller

bargains, they may have to be penalized in some way. Methods of punishment include barring a violator from partaking in a future vote-selling situation and requiring compensation or jail time. The additional costs incurred to punish violators can be called (5) enforcement costs.

In view of the transactions costs involved in buying votes, many potential gains from this type of vote-buying would not be realized.

There are cases in which transactions costs are not as high as our simple model would suggest. First, many of the beneficiaries of a change in the vote may already be members of a club formed for another reason. Farmers, for example, often join cooperatives to share information. Suppose that most of an existing cooperative's members would benefit by, say, high government spending on pest control research. Then their transactions costs of raising the funds necessary to buy votes would be relatively small. If the farmers lived in a representative democracy where a small number of representatives pass laws, costs would be even smaller, since the farmers need only bargain with a small number of vote-selling legislators. Finally, if the legislators must reveal their votes, as they do in a modern constitutional democracy, the enforcement costs are lower. We discuss the buying of legislators' votes in part four.

When the number of voters is large, high transactions costs limit the ability of vote buying and selling to eliminate the inefficiency of majority rule legislative decision-making in a direct democracy.

Vote trading is costly, although individuals have an incentive to discover ways to reduce the costs. Because it is costly, there is no reason to expect that it would enable individuals in a direct democracy to achieve complete efficiency in the supply of public goods by means of majority rule even if it were allowed. Nevertheless, it is important to realize that there is a potential gain in efficiency due to vote trading.

If people always expected the buying and selling of votes to increase efficiency, they would have no reason to outlaw it in a direct democracy. However, vote-buying and selling may also lead to inefficiency. In part 2, we showed the possibility of this in our three-person model. We noted that in the small numbers case, it would be an unusual outcome, since transactions costs are small. Because transactions costs in the large numbers case are likely to be large, an inefficient outcome is more likely. To see this, refer again to the example shown in figure 10-1. This time, suppose that the quantity chosen by the median voter is q*. There would be complete efficiency. However, both the individuals who prefer more and those who prefer less would have an incentive to buy the median voter's vote. Transactions costs would deter this. But individuals have means of overcoming transactions costs.

If transactions costs were the same for groups on both sides of q*, their bids may balance out. If neither side can successfully outbid the other, both sides may ultimately decide not to bid. In this case, the efficient quantity q* would still be chosen. However, substantial transactions costs may be incurred during the time when the two sides are discovering the futility of bidding.

Transactions costs are unlikely to be the same on both sides. One reason is the numbers. Other things equal, the transactions costs are higher for large numbers than for small numbers. This is especially important because democratic governments usually pay for additional quantities of a public good by raising the general level of taxes. The marginal benefits of supplying a public good may be substantially lower than costs. However, the benefits may go to a relatively small number of people while the increased taxes are paid by everyone. In this event, the transactions cost advantage to the smaller number of beneficiaries may push the quantity supplied way beyond the efficient quantity.

A second reason for different transactions costs is that the distribution of benefits may differ from the distribution of the costs. Consider an example. Suppose that there are 101 voters. 50 prefer a quantity lower than q* (the "low group") and 50 prefer a higher quantity (the "high group"). Suppose further that the median voter offers to sell his vote to the group that bids the largest sum of money. Assume for simplicity that the median voter attaches a value of $500 to his vote. Also assume that his vote is worth the same to each group taken as a whole. If he sells his vote to the low group, the sum of their benefits is $2,000; if he sells his vote to the high group, the sum of their benefits is also $2,000. The difference, we assume, is the distribution of the benefits.

For the high group, we assume a perfectly equal distribution. The benefits are the same to each member (i.e., $40 each). Thus, if the median voter votes for a higher quantity, each member of the high group would gain $40. In the low group, however, we assume that half of the benefits are received by a single person. If the median voter votes for a lower quantity, one member of the low group would gain $1,000 while each of the others gain approximately 20.41 each.

Under these circumstances, one member of the low group would be willing to pay up to $1,000 by himself for the vote. Members of the high group could not outbid him unless they made a collective decision and thus incurred the transactions costs of doing so. At least half the members would have to join in sharing the cost of vote buying.

When the number of voters is large, vote buying and selling in the presence of transactions costs can lead an otherwise efficient outcome in majority rule legislative decision-making in a direct democracy to become inefficient. There are two reasons:

1. The number of beneficiaries may be greater or less

than the number of losers.

2. The distribution of benefits may differ from

the distribution of losses.

The transactions cost problem becomes more complex when we realize that ongoing democratic societies contain already-formed organizations and pressure groups.

If members of these groups tend to be beneficiaries of a public good or if they are the main taxpayers, efficiency will be effected. We recognize even greater complexity when we shift our discussion from a direct democracy to a representative democracy. In the latter, payments to change a vote must be made to legislators or their political parties, not to voters; and payments are often made in the form of campaign contributions or other favors, not money.

We really cannot say very much more about transactions costs in general. Each case is different. The only point we want to make is that because of transactions costs, it is possible that vote trading would lead to inefficiency even if the median voter demands the efficient quantity.

In light of this result, it is easy to understand why constitution-makers with insight might want to outlaw vote-buying in a direct democracy. By eliminating legislative vote-buying, they would expect to substantially reduce very large -- and in many cases wasteful -- costs of carrying out transactions. However, they would want to balance this against the fact that an effective law against vote-buying would raise the costs of increasing efficiency in this way.

Consider an example of legislative logrolling under simple majority rule in a representative democracy. For simplicity, assume that preferences of legislators are single-peaked and that there is an exhaustive vote (see Chapter Seven). In addition, assume at first that each legislator votes in accord with the wishes of the majority of voters in his district. Let us focus on two legislators. The first represents voters who want a moderate amount of police but a low amount of education services. Assume that the voters in her district do not feel strongly about police services, but that they feel very strongly about having a small education budget. In other words, they would not object strongly if a law is passed that causes police services to be smaller or larger than a moderate amount. But they would strongly object to laws that raise education services above a low level.

The second legislator represents voters who want a low amount of police services and a moderate amount of education services. The strength of these voters' preferences is just the opposite of the first group of voters. They feel strongly that police services should be low while they do not feel strongly about having a moderate budget for education services.

Logrolling enables legislators to more effectively represent their constituents' preference intensities.

Under these circumstances, the two legislators could please their constituencies by trading their votes. The first could agree to vote for a small amount of police services in exchange for the second's agreement to vote for a small amount of education services. If enough legislators were in similar situations, the result would be less of both services than if the trading did not occur. Because logrolling allows legislators to bargain, it enables them to more effectively represent their constituents' preference intensities.

As in the case of the direct democracy, logrolling can also lead to inefficiency. This is because of the transactions costs required to trade votes. Legislators who represent districts where members want quantities of public goods that are inefficient from the standpoint of the whole collective may face lower transactions costs of buying or trading votes than legislators who represent the opposite kind of districts.

Logrolling enables legislators to more effectively attract campaign contributors, act in the interest of their political parties, engage in political profiteering, and solicit bribes.

Legislators may have other incentives to trade votes besides the goal of representing their constituencies. We saw in Chapter Eight that legislators may be swayed by campaign contributions. If a legislator is a member of a political party, then the party will have an influence. Finally, some legislators may engage in political profiteering (see Chapter Five) or solicit bribes. Thus, the incentive to logroll may come from a variety of sources.

Implicit logrolling: combining issues in the same proposal in order to take advantage of potential gains from vote trading. This is typically used when explicit logrolling is outlawed or disliked by voters.

Writers in public choice have distinguished between two types of logrolling: explicit and implicit. Explicit logrolling was described in the last paragraph. To understand implicit logrolling, suppose that there is no explicit logrolling, perhaps because there is a law against it. England has such a law, although the U.S. does not. Under this law, the two legislators described above could propose that instead of voting on police and education separately, the legislature should vote on them together. They could propose a bill that combines a relatively low police budget with a relatively low education budget. This is implicit logrolling. They both would prefer this bill to the moderate amounts of police and education services that would pass if the two issues were voted on separately.

Note that implicit logrolling involves no actual vote-trading. Thus a more descriptive term might be issue-combining.

When we think about vote trading throughout the world, it is important to recall the special viewpoint that the economist takes when he analyzes democracy. Because he is interested in efficiency and the production of goods, he assumes that before the collective is formed to make decisions on public goods, there is a market economy for the supply of private goods. In the market economy, each economic actor is free to choose among the alternative jobs and employment offers for his other resources. He can even start his own business and employ others. Beginning with the market economy, these free individuals decide that they may be able to improve the supply of public goods. So they join together in a collective with the goal of producing rules for making collective decisions about public goods supply and correction of market failure. Under these conditions, it is easy to understand why such rules may contain provisions against vote buying and selling.

In fact, the people in most of the democracies that have formed since World War II did not have a market economy. Instead of being free to seek their own employment, many have relied on others, including government officials, for employment. Being unfree in their economic exchanges, there is no reason to believe that they would feel free in their political exchanges. As a result, they may not demand that their constitutions contain clear provisions about vote trading.

Consider a stylized scenario that seems to fit some of the new democracies. Suppose that at the time immediately before democracy, the people had adapted to a patronage system. In a patronage system, ordinary people who want to maintain their rank or class must find a patron. In order to gain favor with the patron, a person must ordinarily provide services to him and persuade him of her loyalty. The patron, in turn, provides services for those who patronize him. Some writers view patronage as a system of exchange. However, the relationships are more permanent and their basis is quite different from market exchanges. A long tradition of patronage leads the patron and patronizers alike to feel duty-bound to fulfill the functions associated with their traditional rank, or role.

Patronage system: a system of social relations in which

1. ordinary people who want to maintain their rank or class must find a patron to whom they become loyal and provide services, and

2. patrons feel a duty to provide services to those who, respectively, patronize them.

To people who are accustomed to this system, a shift to the democratic election of representatives is not a means of causing public goods to be supplied but a means of applying their traditions to a new environment. If the patrons become candidates for political office, voters at first think they have a duty to vote for their patrons. And patrons, at first, think that they have a duty to reward patronizers. Under these conditions, it is not surprising to find that the a patron would pay money or give gifts to voters even though he cannot verify that the voters voted for him. And it is not surprising to find that the recipients of the gifts feel an obligation to vote for the patrons.

When a patronage system is transformed into a democracy, former patrons may be able to retain political office over a long period even though they supply public goods inefficiently and interfere with the market economy.

Patrons from different voting districts may join together in a political party. The strength of such a party may be formidable to challengers. This may not be because the party provides more benefits to voters than its challengers, although it may. It may be because voters feel obligated to vote for the patrons and their associates.

The patronage system has the potential for blocking the freedom that is necessary for a fully-functioning market economy. Patrons may use their power to grant special privileges to particular businesspeople, thereby introducing inefficiency in what might otherwise be an efficient market economy. Patrons may also supply public goods inefficiently. In a competitive political system, a candidate who failed to be efficient in the eyes of the electorate would be quickly voted out of office. In the patronage system, however, loyalty ranks higher than efficiency as a criterion for deciding how to vote. Thus former patrons who supply public goods inefficiently and who interfere with the market economy can remain in office for a long time.

The single-party dictatorships that previously ruled in most of the new west Asian and east European democracies were basically patronage systems. The patrons in these cases were the communist party leaders at the top and the various party representatives that administered the various regions, districts, and villages.

It may take generations to change such traditions. Old patrons and their appointed successors may be elected to office for many years out of loyalty. Gradually, however, competing candidates are able to reveal the inefficiency (and possibly corruption) of many of the patrons. A major change occurs when the patrons’ party is first voted out of national office because it violated the patronage tradition. The opposition immediately gains access to government documents and quickly learns about the activities of its predecessor. The result is often a revelation of inefficiency and corruption. As voters' learn about the inefficiency and/or corruption, many may begin to question the whole philosophy of the patronage system. When this happens, they may shift from being loyal to particular patrons or political parties to voting for the candidate who seems to best represent their interests.

Unconditional aid to former patrons in a new democracy tends to delay the defeat in elections of inefficient and corrupt politicians.

Many of the more economically-developed countries have provided financial aid to the elected leaders of new democracies. In some cases, the aid has been a reward for removing trade barriers, integrating with the world economy, or expanding democracy. In many cases, however, the money has simply been handed over to the leaders with no, or few, restrictions. Often the leaders are the same as those who ruled the country under a single-party dictatorship. Such financial aid puts the leaders in control of comparatively large sums of resources and money that they otherwise would not have had. This kind of aid policy tends to prolong a patronage system. Patrons who receive such aid can delay the usual democratic means of getting rid of inefficient and corrupt patrons. If incumbents were not given aid, competing political candidates would more promptly reveal inefficiencies and corruption.

In former patronage systems, "development aid" as it is now administered probably forestalls the development of mature democracy. A wiser policy would be to provide direct help in the form of police and judges to strengthen the rule of law and to monitor elections. In other words, the major capitalist democracies should hire skilled, experienced people for these jobs and offer them as replacements for local police and judges. What would amount to the same thing, they could offer to accept the country (or parts of it) as a new state or province, provided of course that it accepts the existing laws and procedures.

Unconditional aid given by central governments to local governments tends to promote patronage and the consequent inefficient supply of local public goods and uneconomic intervention in the market economy.

The same principle can be applied to democratic countries in which the central government collects most or all of the taxes and then gives grants to locally-elected government officials. Most of the newer democracies seem to operate in this way. The result is to prolong the patronage system at the local level. To help get rid of local patronage systems, central governments should give substantial taxing and spending power to local governments. If a locally elected leader uses his tax monies unwisely, voters could get rid of him at the next election. If a central government wishes to help local governments, it should do so by increasing the chance of fair and free elections and by assuring rights of citizens to gather and distribute information about their elected local politicians. It should also protect citizens from local oppressions and intimidation and it should remove legal barriers to mobility and trade.

Much of the money that is given by central governments to local governments today is used to supply local public goods. This method of supplying local public goods not only promotes patronage, it also promotes inefficiency in the supply of the local public goods. This problem is discussed in Chapter Eleven.

1. Assume that there is a representative democracy in which lawmakers, by majority vote, decide on how much of a pure public good will be supplied. Members of the collective who wanted to change the outcome of the vote could do so by using money. Assuming that there are harsh and strictly enforced laws against directly buying votes from legislators, tell how the members could use their money indirectly to influence the outcome of the vote.

3. Use a simple example of direct democracy and three persons to show how vote buying could increase efficiency.

4. Use a simple example of direct democracy and three persons to show how vote buying could decrease efficiency.

5. Assume a direct democracy in which a single pure public good is being supplied to a large number of citizen-voters. Assume that voter preferences are single-peaked so that the median voter theorem prevails. Is it possible that buying and selling of votes would reduce efficiency? Explain how?

6. Assume a direct democracy in which a single pure public good is being supplied to a large number of citizen-voters. Assume that voter preferences are single-peaked so that the median voter theorem prevails. Give an example to show how transactions costs affects the relative power of different groups to change the median voter outcome.

7. Assume a direct democracy in which a single pure public good is being supplied to a large number of citizen-voters. Assume that voter preferences are single-peaked so that the median voter theorem prevails. If the beneficiaries of a change in the median voter's vote could join together to buy his vote, they might be able to raise efficiency. But they face transactions costs. Name and describe the costs of making a collective decision to buy a vote.

8. Assume a direct democracy in which a single pure public good is being supplied to a large number of citizen-voters. Assume that voter preferences are single-peaked so that the median voter theorem prevails. Tell the role of transactions costs in helping us decide whether vote buying is likely to increase or decrease efficiency. (To answer this question, you should first briefly tell why an inefficient amount might be supplied. Next you should discuss how the inefficiency might be overcome. Finally, you should show how transactions costs might prevent this from happening. You must define transactions costs and tell the different types.)

10. Logrolling enables legislators to more effectively represent voters' preference intensities. Explain how. (You may wish to give an example. However, do not use the example from the text.)

12. Some observers of patronage systems complain about vote buying even thought there is a secret ballot. Why would candidates in a patronage system give money and gifts to voters before an election if they cannot find out how the voter votes.

14. Explain how a patronage can block the development of a fully-functioning market economy.

15. Describe the major change, according to the book, that occurs in the transition from a patronage system to the development of true democracy.

16. Explain how "development aid" from an economically developed country to a less developed new democracy can prolong a patronage system.

17. Explain how "development aid" from the central government to a local government can prolong a patronage system.

Gunning’s Address
J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
Taiwan, R.O.C.
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