Choosing Institutional Microfeatures: Endogenous Seniority Kenneth A. Shepsle Harvard University Keynote Address Second Annual International Conference Frontiers of Political Economics Higher School of Economics and New Economics School Moscow May 29-31, 2008

Introduction INSTITUTIONS: Imposition--institutional designers Choice--institutional players Emergence--historical process

Ubiquity of Seniority Legislatures Age grading LIFO union contracts PAYG pensions Academic & bureaucratic grade-and-step systems

Previous Modeling Approaches Binmore’s Mother-Daughter game Hammond’s Charity game Cremer and Shepsle-Nalebuff on ongoing cooperation Can an equilibrium privileging a senior cohort or generation be sustained?

Modeling the Choice of Institutions Legislators choose a seniority system Tribes select and sustain ceremonies and rights-of- passage between age-grades Unions and management negotiate last-in-first-out hiring/firing rules Social security and pension policies are political choices Grade-and-step civil service and academic schemes are arranged or imposed

McKelvey-Riezman Three subgames – institutional, legislative, electoral Definition: A legislator is senior in period t if he or she was –a legislator during period t-1 –reelected at end of period t-1

McKelvey-Riezman Institutional Subgame Majority Choice: In period t shall seniority be in effect? (yea or nay) Yea Seniors have higher initial recognition probabilities Nay The recognition probability is 1/N for all legislators

McKelvey-Riezman Legislative Subgame –Baron-Ferejohn Divide-the-Dollar –Random recognition with probabilities determined by seniority choice –Take-it-or-leave-it proposal –Recognition probabilities revert to 1/N if proposal fails

McKelvey-Riezman Election Subgame –Voter utility monotonic in portion of the dollar delivered to district –Legislators care about perks of office (salary) and a %age of portion of dollar delivered to district –Voters reelect incumbent or elect challenger –Incumbent and challenger identical except former has legislative experience

McKelvey-Riezman Time Line –Decision on seniority system –Divide-the-dollar game –Election

McKelvey-Riezman Main Result –In institutional subgame, incumbents will always select a seniority system –In equilibrium it will have no impact on legislative subgame –Because in the election subgame it will induce voters to re-elect incumbents

McKelvey-Riezman Main Result: Remarks Implication: In equilibrium all legislators are senior Implication: Divide-the-dollar game observationally equivalent to world of no seniority. But seniority has electoral bite

McKelvey-Riezman Main Result: Remarks Seniority defined as categorical (juniors and seniors) and restrictively Recognition probability advantage to seniors only initially In a subsequent paper they show that rational legislators would chose the “only initial” senior advantage, not “continuing” advantage

Muthoo-Shepsle Generalization Seniority still categorical But the cut-off criterion is an endogenous choice

Muthoo-Shepsle Generalization: Institutional Subgame Each legislator identified by number of terms of service, s i s = (s i ) state variable Each legislator announces a cut-off, a i The median announcement is the cut-off s* = Median {a i }

Muthoo-Shepsle Generalization s i > s* → i is senior s* = 0 → no seniority system s* > max i s i → no seniority system

Muthoo-Shepsle Generalization: Basic Set Up For cut off s*, let S be the number of seniors 1/S > p S > 1/N – senior recognition probability (p S ranges from 1/S if only seniors are recognized to 1/N if seniors have no recognition advantage) p S = (1 - S p S )/(N – S) – junior recognition probability p S < p S

Muthoo-Shepsle Generalization: Results Lemma (Bargaining Outcome). For any MSPE, state s, and cut off s* selected in the Institutional Subgame and discount parameter δ : –If S=0 or S=N, then all legislators expect 1/N of the dollar –0 < S < N, then the expectation of a senior (z s ) and a junior (z j ): z s = δ/2N + (1 – δ/2)p S z j = δ/2N + (1 – δ/2)p S Expected payoff monotonic in recognition probabilities for each type Lemma (Incumbency Advantage). In any MSPE voters re-elect incumbents.

Muthoo-Shepsle Generalization: Results Theorem (Equilibrium Cut Off). If p S is non- increasing in S and p S is non-decreasing in S, then there exists a unique MSPE outcome for any vector of tenure lengths s in which the unique equilibrium cut off, selected in the Institutional Subgame is s* = s M where s M is the median of the N tenure lengths in s. A seniority system is chosen and the most junior senior legislator is the one with median length of service.

Muthoo-Shepsle Generalization: Results Alternative seniority system? Definition. For s any element of s, P(s) is a probability-of- initial-recognition function. Theorem (Alternative seniority system). If a legislator is restricted to announce P(s) non-decreasing in s, then he will announce 0if s < s i P i (s) = 1/N(s i )if s > s i where N(s i ) is the number of legislators whose length of tenure is at least as high as s i

Muthoo-Shepsle: A Summing Up Under specified conditions the legislator with the median number of previous terms served will be pivotal She will set the cut-off criterion at her seniority level, even if she can offer a more fully ordinal schedule Selected categorical seniority system: most junior senior legislator has median number of previous terms of service

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