The Role of Institutions in the Revival of Trade: The Law Merchant

by Paul Wilgrom, Douglass North, and Barry Weingast:

Reputation:

Institutions help traders gain reputations in large communities where would be otherwise improbable. The system of judges before the rise of law encouraged merchants to be honest, impose sanctions on violators, become adequately informed on others' behavior, provide evidence against violators, and pay any judgments assessed against them.

The temptation to cheat in the short-run makes trust difficult to create. One way to ensure honest transactions is to make a continuing relationship an asset that a party could lose by dishonest behavior. Only the opportunity for a big pay-off would compel a merchant to surrender such a valuable bond.

A reputation system sometimes only work where it encompasses sufficiently many traders and trades as the greater volume of contacts and agreements a merchant undertakes, the higher his credit score.

But if informal arrangements based on reputations can effectively bond good behavior, then what is the role of formal institutions in helping to support honest exchange? Given the existence of so many large and specialized institutions to facilitate agreement between all kinds of businessmen and politicians, it appears something more than mere reputation is necessary. In other words, why do reputations fail to cover all transactions, and why do formal institutions emerge when they do?

With no state enforcement of contracts or an established body of commerical law, merchants had to create their own private code in the Middle Ages. Disagreements were handled by a judge, be he a local official or private merchant. Judges had only limited powers to enforce judgments, so why have them at all?

The Medieval Law Merchant:

In order to capture the gains associated with geographic specialization, a system needed to be established that lowered information costs and provided for the enforcement of agreements across space and time. There was no state to enforce contracts or protect merchants from pirates and brigands. Commercial law predated the rise of large-scale third-party enforcement.

As trading communities grew larger, it became more difficult for merchants to monitor one another's behavior. New institutions were needed to mitigate cheating. As trade grew more disperse, merchants needed greater assurance that their partners would not take advantage of wide expanses of space and reneg on deals.

Merchants moved to towns where they developed their own law. Merchant guilds arose to provide protection to local merchants against insidious ittiernants. Legal codes governing commercial transactions arose and were administered by private judges drawn from commerical ranks which by the end of the 11th century had created a uniform set of standards across large numbers of locations.

Commerical law, therefore, can be understood as coordinating the self-interested actions of merchants as well as coordinating the actions of people limitied knowledge and trust.

The code provided a means for reducing uncertainty and limited the ability of locals to cheat foreigners. As towns lacked the power to enforce standards outside of their region and states had not developed to the point where nefarious international hustlers could be caught. The development of mutually benefical trade could only occur as long as merchants obeyed the code.

Champange Fairs:

The Champange Fairs provide an interesting example that illuminates the importance of reputation. A legal system existed in the 12th and 13th centuries for judication of disputes, but nothing prevented a merchant from providing low quality goods and peacing. Even a judgment against the supplier would not matter if he never returned to the fair. Ostracism appears the logical route, but if this were the case, why would a legal system be required at all?

In a prisoner's dilemma game, assume the following: if both players go it honestly, they both make a profit. If both players cheat, no one gets anything. A trader profits through cheating an honest partner and imposes a larger loss on his honest partner. If the game is only played one, both players will cheat because the result of cheating is still better than getting cheated.

However, repeated transgressions lead players to condition their actions based on what transpired in the past, meaning they have an instrument to reward honest behavior and punish cheating. If trade is frequent, then there is a Nash equilibrium where the player adopts the Tit for Tat strategy, in which the player will go it honestly the first time and react to whatever his partner played the second time and so-on.

The central idea is that frequent trading with the same partner, or "clientization," makes it possible to find an equilibrum with efficient trading. It holds for virtually all repeated games, regardless of players. The same conclusion also holds in a community of traders in which players change partners often and cheaters do not have to face a former partner ever again, provided that information about the behavior of the traders is widely disseminated throughout the community.

Suppose there are N traders and there is some rule M that matches them at each stage. Let h, be the history of trade through date t and let M(h1,i) be the identity of the trader matched with trader i at date t + 1 at history h1. If player i plays honest at date 0 and then plays cheat at date t + 1 if two conditions hold: his partner failed to recognize his equilibrium strategy or the other player cheated the first time. A trader who cheats will eventually be punished by the next merchant he meets even if that merchant is honest and has never met the cheater.

Punishing the cheater is directly profitiable because punishment is delivered by playing Cheat. A merchant who fails to deliver a punishment, by participating in a boycott or something, is also subjected to punishment from the community.

There is no point at which a merchant can make a one time play different from equilibrium pay that raises his total payoff. It is not necessary for any pair of traders to interact frequently in order for a boycott mechanism to be effective. But that relies on the condition that members of the community are well-enough informed to know who to boycott.

The Law Merchant Enforcement System:

In the incomplete information of the Prisoner's Dilemma game where no traders meet twice and no trader's behavior can directly or indirectly influence the behavior of his future trading parners, the outcome of any Nash equilibrium is that each player plays Cheat at every opportunity. There are no incentives for honest behavior. Incentives can be restored by introducing an institution that provides full information to each trader about the other operates, but that would be costly. Efficient trade does not require that every trader know the full history of behavior of each trader. One only needs to know his own history of behavior and whether his partner had defected on the previous turn to determine his current behavior. How does one arrange that the traders are adequately well informed so that they can sanction a cheater when necessary.

Imposing sanctions and remaining aware of them can be personally costly. Institutions must keep traders adqueately informed of their responsibilities and motivate them to do their duties. One who keeps informed about who should be punished for past actions is supplying a public good by deterring others from cheating. No trader except his current partner will ever know if a trader does not check his partner's present history. A trader could avoid supplying the public good without facing any sanction. Therefore, cheated traitors must be motivated to document perfidies. If players who are cheated are unwilling to invest in informing their neighbors, the Cheater will profit from his action and all Honest trade suffers.

LM = Law merchant, the repository of information and the adjudicator of disputes. Any party can accuse any other of cheating and appeal to LM. Any dispute appealed to LM is perfectly and honestly adjudicated at cost C to the plantiff. The LM's pronouncements include the ability to award damages if the defendent is found to have cheated the plantiff. The payment of the damage is voluntary in the sense that there is no state to enforce payment. Any party can visit LM prior to finalizing a deal. At a cost of Q, the party can query for the records of previous judgments. Here is the sequence of play:

1. Players may query ther LM about their current partner at utility cost Q > 0. In response to a query, the LM reports to the players whether a party has any 'unpaid judgments,'. Whatever transpires at this stage becomes common knowledge among the LM and the two players.
2. The two players go through the Prisoners' Dilemma gameto learn the outcome.
3. Either party may make an appeal to LM at a personal cost ofC> 0, but only if he has queried the LM.
4. If either party makes an appeal, then the LM makes a judgement, J, to the plantiff if he has been honest and his trading partner cheated. Otherwise, no award made.
5. If a J awarded, the defendent may pay it at personal cost f(J), or he may refuse to pay it, at cost o.
6. Any unpaid judgments are recorded by the LM and become a part of the permanent record.

The player's utilties for the extended game are determined as the sum of payments recievied less than those made. In this case, an Honest player who is cheated and appeals recieves: - Q, - X (cheat) + J - C, of the other party pays the judgment, and - Q, - X, and -C, if he does not.

The function of f: R (the utility of paying a given judgment - it can be assumed the greater the size of the judgment, the greater the cost to the defendent. The cost of paying the judgment is never less than paying the judgment itself. This excludes the possibility that paying judgments adds to the total utiltiy of he players.

The desired behavior in such situations goes as follows:

Part 1: A trader queries the LM if he has no unpaid judgments on record, but not otherwise.
Part 2: If either player fails to queries the LM or if the query establishes at least one player has an outstanding judgment, then both players play Cheat: otherwise, both play honest.
Part 3: If both parties fuliflled part 1, and exactly one of the two players Cheated at part 2, then the victim appeals to the LM, otherwise, no appeal is filed.
Part 4: If a valid appeal is filed, the LM awards damages of J to the aggrieved party.
Part 5: The defendent pays the judgment J if and only if he has no other outstanding judgments.

1 - Q (frequency of trade)/1 - frequency of trade) > f(J) > the max amount (x - 1), f (C).

In evaluating expected payoffs, players must make certain conjectures about what others have done to forecast what will happen. We assume that the trader beleives that all others have played according to the rules in all past plays except where a detection is caught. Must assume all will obey the rules in the future.

Paying a judgment yields an expected payoff of -f(J) in the current period. In future periods, the player will spend Q to query the LM and earn a trading payoff of 1. If the player refuses to pay a judgment, then he is stuck at zero, and his payoff in every subsequent period is also zero. Therefore it pays to pay judgments if and only if f(J) < (1 - Q) frq. (1 - frq of trade). Does it pay the victim to appeal where it incurs personal cost c. Given the above, the trader can expect the judgment to be paid. So f(J) > f(C).

If there are no unpaid judgements and the LM has been queried, does it pay for the trader to play honest? If he does, it will be 1 -Q. If he cheats and adheres to the abovementioned strategy, it will be - Q + the benefit of cheating - f(J). Equilibrium requires the former is larger, or that f(J) > cheating - 1.

The cheat always maximizes payoffs for the current period, so it does pay. It makes sense for both to query LM without pay periods because they will benefit only if 1 - Q, if Q > 1. Does it pay a party with an outstanding judgment to query? No, because his partner will cheat him and o > -Q.

There is NO situation in which a one-time deviation from the LM is profitable for a trader provided that paying the judgment sufficient enough to deter cheating, the judgment must be large enough to cover the cost of the appeal, and it must not be so large that the cheater refuse to pay it, for then the injured party would get nothing to collect and find it unprofitble to appeal. If traders live at great distances from one another and if their principal asset holdings are illiquid, then wealth transfers will be costly and probably would not work.

It must be worthwhile for traders to query the LM. If traders fail to query, then they possess insufficient information to administer punishment and once again cheating will go unpunished. Traders who fail to query are constantly cheated by their trading partners.

Minimizing Transaction Costs:

There are transaction cost to this system.

Aume the following:

Q C P temp. to Cheat discount factor J
X .5 .5 50% 2 .67 1
Y .5 1 50% 3 .80 2
Z .5 3 50% 7 .90 6

The LM system is not viable if the cost of making and investigating a claim or the cost of a judgment is too high for the traders cannot be expected that others will make the same claims. They only act as deterrents. Any institution that restores incentives for Honest trading by restoring the effectiveness of decentralized enforcement must inform a player when his partner cheated in the past. If the temptation to cheat is small and trading frequent, information need not be perfect. If one can lower the cost of query, it could be more effective. LM system avoids unnecessary costs of dispute resolution and los on tranfers. It centralizes the information system so that information about any partner is in one place. The costs incurred by LM are inevitable.

Dishonest Law Merchants:
Perfect judges are a luxury no historical economist would apply to here. A trader extorted by a judge would need recourse to reestablish his reputation. How is it in the interet for the LM to behave honestly due to client incentives in the long-term relationship between himself and the trader. If a trader pays a bribe, he will be subjected to future extortion. A LM who threatens the reputation of a trader only loses business with little gain for himself.

Lets suppose LM earns 2x > 0 per contract as part of the 2Q that the parties spend to query him. Let us suppose a LM tries to extort an honest trader. The amount B is chosen by the LM. If the bribe is not paid and a query is made, the LM reports falsely. When a B is paid, the LM's payoff increases by B and the victim's is reduced.

No player who paid a bribe, cheated, and then had a judgment charged against him would ever pay it because he would only be extorted in the future. If a player bribed in the past, then the profits for paying the bribe are cheat - q - bribe. Not paying leads to zero. It is profitable whenever B is less than or equal to cheating minus q.

If a player has paid a bribe before, he will pay anything up to cheat -q. If a player hasn't paid a bribe and one is demanded, if he takes it, he will cheat, and the payoff will be Cheat - B - Q and, as a trader with an unpaid judgment, 0. His payoff in the current period is 0 if he refuse to pay and 1-q in the future.

When facing a trader who has never before paid a bribe, the LM expects that any demand for a bribe will be refused and that trader will also not query, leading to a loss of revenue.

The worse problem is preventing traders who cheated in the past from trying to pay people off.

Political Economy of Public Policy

ARROWS THEOREM

Suppose the following: at leat 3 ppl with at least 3 alternatives where the 3 people are allowed to have any rational preference they like.

Given that society, there is only one aggregation rule that always returns transitive social preferences; is not sensitive to irrelevant alternatives; and always respects unanimty of preference: and that is dictatorship.

The notion of the general will is incoherant. How we set priorities is not founded on some notion of what is best for everyone. How we ask a social question and how it is answered is deeply dependent upon how we ask and tally the results. The general will is never certain to be what will be fefined. The proper goals of public policy are not institution gfree. The objectives of societie and politicians are shaped by institutions employed: policymaking is deeply political and institutions contrain and explain policymaking.

Agenda Setting: A Sample:

Lets suppose a committee of three have preferences over the use of resources over issues like guns and butter. Preferences can be represented spatially.

Euclidean preferences are those that moving any direction from the point of greatest utility in the same distance yields equal indifference.

The windset of x is the set of policies that would win majority rule against X. So on the graph, where C and B overlap is a windset and any proposed policy would defeat the status quo on a majority rule vote. A cannot win a vote on his choice utility so he will make a deal with C on an agreement amenable to their own interests. In theory, with no agenda setter, this process could go on forever as B could continue to propose policies C would like better than A and A would be retaliate by proposing C.

Majority rule can lead to outcomes that the whole society thinks are universally worse than other alternatives.

If C is the agenda setter, the game ends when C is satisfied. C proposes X instead of Q as the new status quo, helping B and A, but not C. He then proposes point Y, which A and C like better, but B does not. So he moves to point Z, which is his desired outcome, which B prefers to Y, but not to X or Q. A prefers X, Q, and Y to Z. C then ends the game.

Point X allowed A to get a little better off, but by making B unhappy, plays into C's hands. C got his ideal point by manipulating B and A through a series of votes.

Limits to Agenda Setting Power:

Strategic voting allows one to avoid agenda manipulation by the agenda setter. Other institutions, including the privileged place of the status quo and amendment rights in Congress, create a scenario where no matter what you vote on, the status quo always gets the last say: meaning an agenda setter cannot make a preference that the majority of people find more offensive than the status quo.

If the agenda setter wants to move the status quo in a certain direction, he can offer amendment rights. All of this suggests that outcomes are a complicated function of institutional incentives.

Strategic voting: an example using a tree

A: Y > X > Q > Z
B: X > Q > Z > Y
C: Z > Q > Y > X

If the first choice is X vs. Q, X would win a straight up vote because both A and B prefer X to Q. But B and A should both share an interest of preferring Q to Z and should vote to prevent Z from ever becoming preferable to any alternative, in this case Y. So, B should vote on X vs. Q knowing that if X had to take on Y, Y would win, and if Z ever took on Y, Z would win. A should realize that while Y is his most preferable option, that it would lose as soon as C put Y against Z. Therefore, both will fight to make sure Q remains the policy as it is less disagreeable to their interests than Z. In X versus Q, both will select X and hold it knowing that any other outcome leads to Z.

Israeli Election Reform:

Prior to 1992, Isreal had pure proportional representation in its legislature, where a majority coalition would elect Prime Minister and form a government. Voters cast one ballot for one of five political parties. Knowing that only the moderate parties could muster enough support to form coalitions, extremists had an incentive to vote for moderates in the hopes that the moderate party more agreeable to their interests forms a government. More important to have their ideology represented somewhere in the government than have it lead it.

In 1996, the status quo changed. Voters now have two ballots: one for the Prime Minister, and one for the party they want in Congress. Extremists can now claim more voters as their ideological comrades voting for moderates have no incentive to use their ballot for the coalition on the moderate party. Which, according to elementary rational choice theory, is exactly what happened.

Japanese Electoral Reform:

Prior to 1994, the Japanese Parliament was elected through single nontransferable ballots in multimember districts: the five candidates with the most votes won the election.

In 1994, the rules changed as the chamber became mixed-member majoritarian as some members were elected in single member districts and some by proportional representation.

Let us suppose in district X, 80% of the people supports the LDP and 20% support someone else. If 80% of the people vote for the same LDP candidate, only one LDP candidate wins. To prevent fringe people from taking control, leaders of the LDP crearted baliwicks, geographical areas usually close to a poltician's hometown, where each would use their political power to remain elected. To support this system, Japanese politicians had to provide many private goods to supporters at home. Many believed this led to localism and corruption in Japanese politics and wanted institutional change.

The coordination problem was eliminated with the reform and led to a greater suffusion of the vote.

Political Economy of Public Policy

Public Policy: Lecture 1

This class provides a broad theoretical introduction on how politics constrains policy-making. It is divided into four broad categories: why political economy matters; why thinking about feasible policies matter; what kind of political institutions best lead to accountability; and how to get from bad institutions to good ones.

Politics and the Public Interest:

The making of public policy is about serving the general good. What policies are in the social interest? A clearly political question: what is good in the context of the people. What's good for the collective: politics is about groups of people determining what they want to do.

Constraints limit the number of policy options that can be feasibly implemented. How do we structure our institutions (the rules, interaction of bureaucracies, and structure of the government) to make the world a better place? To paraphrase Rousseau, the goal of public policy is the attainment of laws and regulations that serve the general will which leads to the general good. The goal of government, therefore, is to promote the general interests of society: which means the aggregate interests of individuals.

The public interest cannot be determined theoretically: context matters because at different times different people think different things about what is important. An underlying assumption of rational choice is that people know what is best for them. People have preferences over options which must be rational in a limited sense. Preferences must be transitory and are dependent on context. Transitivity is important because it is the minimum requirement of rationality: one cannot prefer beef to chicken and chicken to fish but prefer fish to beef.

The problem of imperceptible differences can arise: if you are indifferent to x and y and y and z, then you must be indifferent to x and z, yet eventually a chain of indifference yields some preference . . .

An outcome is in my individual preference if it reflects my interest. Society/social interest is really the collective interest from a group of individual ones.

An example of majority rule: if X gets more votes than Y, then X is preferred to Y. Lets suppose there are three tax rates: low, medium, and high and three voters: poor, middle class, and rich.

Poor's preferences: high, medium, low
Middle Class: medium, high, low
Rich: low, medium, high.

Medium is preferred to high and high to low, and medium to low, therefore, medium wins.

Majority rule can fail to produce coherent preferences:
1. x, y, z
2. y, z, x
3. z, x, y.

X > Y, Z >X, and Y > Z which renders society intransitive as it lacks rational preferences. In this case majority rule fails to identify the collective interest. While a majority may prefer one policy to another, another majority will be found that prefers another policy to the one enacted.

In this example, however, nothing is specified about the rules of the political process: the outcome in the real world will be determined by a game.

Borda Count:

The Borda Count is a crude utilitarian method of assigning points to each alternative based on individual preferences, producing a result that sums up the scores.

X3, Y2, Z1
Y3, Z2, X1
Z3, X2, Y1

In this method, society is indifferent to the outcome as all points added up yield the same result.

While intuitively appealing, the Borda Count fails to recognize that social preferences are not immune to the adding of irrelevant alternatives: for example:

If two people think X>Y>Z
one person: Y>Z>X
one person: Y>X>Z

where first choice gets 3, second, 1, third 0, y gets 8, x gets 7, and z gets 1

If you add W, then
two people: x>w>y>z
one person: y>z>x>w
one person: w>y>x>z

X gets 6, W gets 5, Y gets 4, and z gets 1. In other words, the group now prefers X to all others, even though they preferred y before. This is aking to saying you prefer chicken to beef, but when fish is added to the mix, you prefer beef to chicken or fish. This is not a good way to figure out preferences. The problem, however, was not the decision-making, but the aggregation method.

In an amendment procedure which the professor moved too quickly through for me to copy all down, a majority might agree X>Y, but the weighting of votes allowed Y to win.

Arrow's Impossibility Theorem:

Arrow assumes that a society with three people, three alternatives, and the capacity to order alternatives in any way they want: there is only one way aggregation rule that will return a transivtive outcome with a unamity of preferences and is sensistive to alternetives: the rule of dictatorship.

Group Choice and Majority Rule

Cyclical Majorities

Condorcet's Paradox: An individual's preferences in a group, though consistent and transitive, need not be true of the group's preferences. A majority will prefer A to B, or B to C, but another majority will prefer C to A, rendering the arrangement nontransitory. What a group ends up doing will be cyclical, but it is of great importance as legislatures from town halls to Congresses operate under this assumption.

In a group of three, an individual has 13 ways of ranking his preferences. Rankings one through six, i.e., he can go ABC, ACB, BAC, BCA, CAB, CBA, are known as strong preferences. He can put two preferences together, i.e. A, BC; B, AC; C, AB; AB, C; AC, B; BC, A; and create a series of weak preferences. The final ordering represents complete and total indifference. 2197 possible preferences between three people might be made. For the sake of simplicy, the textbook focuses on 6*6*6.

Out of 216 possible outcomes, how many are affected by Condorcet's Paradox, i.e. how many possible scenarios will develop where no majority can be met? In most situations, the odds are high that majority rule will run smoothly, meaning majority rule works most of the time.

But life isn't as simple as a Condorcet Paradox. The number of alternatives and people increase in society. We should try to derive a probablity that given the number of alternatives and the number of individuals in a group, a majority outcome can be reached, in other words, the ratio between the preferences of the group, and the alternatives.

Probablity of intransitivity (Number of preferences*number of people) = the number of problem configurations/the number of potential solutions)

As the number of group members increases, the chances of intransivity and preference cycles increases to the limit. As the number of preferences increases, the chances for intransivity also increase. In politics, we must tolerate either group incoherence, a highly compressed franchise, or a highly restricted agenda.

It is not always the case, however, that one set of strong preferences is just as likely as another to characterize the preferences of an individual. Society is interdependent and not likely to create problem scenarios as often as these equilibrium scenarios would like. However, as long as the number of preferences remains large in any sized society, the chances of majority cycling remain dangerous.

Cyclical Majorities and "Divide the Dollars"

Political fights often revolve around how to share revenue. How do we divide the deficit is also difficult: from where does one raise revenue/cut funding?

Suppose a board of three men representing different districts of the town must divide a windfall of $1,000. In each case, the more money a politican lands, the better his chances for re-election. In all instances, each politican will recieve a share of at least 0 and no more than 1000. Each politician prefers any outcome where his share is larger than the other two. The so-called "fair distribution" of each side getting 333.33 will get beat by a majority because more prefer a 500, 500, 0 to 333, 333, 333. But to prevent two from ganging up on one, X prefers 700, 0, 300 to any combination of 500, 500, 0. The final outcome of this match will be decided on other institutional features of group decision-making.

Only anti-majoritarian restrictions that allow someone to exercise agenda power, procedural rules etc., would allow anything to get done.

Tax Politics

Various social groups that want to avoid paying taxes will form unstable coalitions which leads to preference cycles.

In the Civil War, one group favored taxing wealth, another land, another no tax at all. In the ensuing fight, someone decided to tax "income," an ambiguous and undefined term that in no way guaranteed that any specific group would be damaged. Congressmen preferred a lottery to no tax at all or a specific tax on land or wealth.

One way to prevent preference cycles is to impose limits on anyone to amend legislation, therefore allowing only the status quo or the proposal. In the event of a tie, the status quo usually wins. Preference cycles emerged in the 1930s when legislators were allowed to constantly amend bills, increasing the number of preferences possible and thereby making it more likely for preference cycle gridlock. Usually limits are imposed beforehand on any legislation.

A bill designed to do-away with tax breaks for special interests was supposed to attract a strong opposition from special interests and their supporters in Congress. In other words, a bill protecting the special interests would defeat the reform bill, but as Congressmen preferred no act at all to be seen as endorsing special interests, no bill was passed. But as each of the special interest groups preferred protecting their own special interests to collective action beneficial to the whole, they could not cooperate and the reform bill passed.

Arrow's Theorem

The problem of group incoherence is a peculiarity of round-robin tournmanets or features of majority rule, but not of voting generally. If one structured the institutional arrangements of group choice differenlty, we could arrive at a system with less incoherence.

In addition to assuming a rational actor capable of defining his preference (or indifference) and staying logical about it, any group acts four different ways:

1. Universal Admissibility: Anyone in the group may adopt any strong or weak and transitive ordering over the alternatives
2. Unanimty: If every member of the group prefers j to k yet we end up with a scheme that has k ahead of j then the group preference must represent that wish.
3. Independence from Irrelevant Alternatives: If j is ranked ahead of k, in the final decision, the later elevation of l does not change j ranking ahead of k.
4. Nondictatorship: If only one person prefers k to j, then the group's decision cannot be k.

There exists no mechanism for translating the preferences of rational individuals into a coherant group preference that simultaneously satisfies all four conditions. Any scheme that satisfies all four criteria is either dictatorial or possesses intransitive solutions. Thus, there is a tradeoff between social rationality and the concentration of power. Social organizations that concentrate power provide for the prospect of social coherence. Majority rule can settle things most of the time, but not always.

Legislative Intent

Liberals prefer interpreting a silence on a particular issue as not restricting the court's or government's power. Conservatives prefer deference to the intent of the legislature. Arrow's therom states that because a group may not have a transitive set of preferences, trying to discover the intent of a legislature is a fool's errand.

Arrow's Theorem and Majority Rule

Majority rule is defined as for any pair of alternatives, if j is preferred to k by more people than it wins.

Reasonable Conditions on Preference Aggregation Methods:

Anonymity: Social preferences not influenced by who has what preference.

Neutratlity: Interchaning the ranks of alternatives in each member's preferencing has the effect of interchaning the group's preference ordering. No matter what we label them, they remain the same.

Monotonicity: The method of group choice cannot respond to changes in individual preferences. If j is strictly preferred at first, and someone changes their preferences to make J higher, J is still strictly preferred. If people are indifferent to j and k at first, but then one person prefers j to k, then j is preferred.

May's Theorem: If a group uses a handcount to satisfy deciding between any pair of alternatives, then it necessarly satisfies Universal Domain, Anonymity, Neutrality, and Monotonicity. Not all preferences are of this nature, of course, and nor should they be.


Black's Single-Peakedness Theorem and Sen's Value Restriction Theorem :

Arrow's and May's conditions are mild and innocuous conditions of fairness. Condition unanimous domain is different. The more it is applied, the greater the chance for a trade off fairness for consistency. Is it possible to restrict domain and obtain both fairness and consistency?

If in every set of alternatives, there is some alternative that is not the worst alternative, then majority rule deems it transitive. In other words, majority rule can work pretty well so long as a minimal degree of consensus exists on some alternative.