1. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 11 The Game of the Committees: A Design to Overcome Rent Seeking?

2. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 22 Colloquium in Human Resource Management Chair of Professor Dr. Bruno Staffelbach, Zurich 2010 Presentation by Peter T. Baltes, Swiss Military Academy at ETH Zurich For their kind help the author thanks: Carine Bisenius, Walter Furter, Odilo Gwerder, Sinan Narin, Martin Sievers, Maximilian Zangger and Xiaoyun Zhou

3. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 3 The General Economic Challenge to Constitutions: Rent Seeking I 1965 / 1971 1982 2000

4. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 4 The General Economic Challenge to Constitutions: Rent Seeking II Definition [of Rent Seeking]: The opportunity to capture monopoly rents provides firms with an incentive to use scarce resources to secure the right to become a monopolist. Such activity is referred to as rent- seeking. Rent-seeking is normally associated with expenditures designed to persuade governments to impose regulations which create monopolies. OECD (highlighting by PTB)

5. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 5 Social Market Economy: A combination of two principles (1) Equal rights for all participants ( Kantian Categorical Imperative) (2) Public help to approximately ensure existence and sufficient competitiveness ( different minds/bodies/backgrounds or plain luck) The General Economic Challenge to Constitutions: Rent Seeking III Screening problem due to asymmetric information: Specific Plea for Support – justified or not? Unjustified pleas = Rent Seeking (Buchanan, Tullock or Olson) = Violation of these two principles

6. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 6 ? In Search of An Iraqi Constitution; Free of Rent Seeking

7. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 7 Main Idea of the Model: 1.Use the groups themselves as experts / agents. 2.Employ a mechanism that provides a sufficient incentive to refrain from rent seeking. The Model: The Principal and the Groups of Iraqi Society as Agents Principal … TnTn T3T3 T1T1 T2T2 The various Iraqi tribes (T i ), ethnic groups or religious factions are represented by n clones.

8. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 8 1.Civil War = current status Each group earns today (= t 0 ) a present value of Zero. The Setting: Determining the Iraqi cake Principal … TnTn T3T3 T1T1 T2T2 Only three different states of welfare are available to the groups 2.Dictatorship = status in the past The group acting as dictator gains in t 0 a PV of v>0. All other groups remain at a level of Zero. 3.Social Market Economy = goal of the principal All groups earn on average today (= t 0 ) a PV of k>0. Rent seeking = losses in efficiency (Intuition: Discrimination causes incentive problems)

9. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 9 1.For, The Path of Investigation Principal … TnTn T3T3 T1T1 T2T2 Two questions are examined: 2.Which level of information asymmetry can be handled by the identified mechanism design in regard to the relationship between v, k and n? = Case II Rent seeking = losses in efficiency (Intuition: Discrimination causes incentive problems) which design features must a specific mechanism design possess to guarantee a constitution free of rent seeking? = Case I

10. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 10 1.All agents are risk-averse: Case I: The Design Features of the Mechanism I Principal … TnTn T3T3 T1T1 T2T2 2.All agents face costs of delay: Common knowledge! 4.In t 0, the principal starts the game: a)Each group transforms to a committee K i. c)In secret, the principal determines a random sequence for the K 1 to K n committees. b)Its mission: Be ready to develop a proposal for the constitution in a specified period of time. K5K5 K1K1 KnKn K n-3 3.All agents seek to maximize their utility.

11. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 11 Case I: The Design Features of the Mechanism II t0t0 Option 1: No change to status quo. K1K1 K2K2 Option 2: Let T 1 be a dictator. Option 3: Let T 5 be a dictator. Option x: Let T 2 be a dictator, but pay b to T n-4. t1t1 Option … Reject the proposal. Option 1 Option 2 Option 3 Option … Accept the proposal. Immediate payoffs to groups according to the proposal. K3K3 General rules to end the game: 1.A proposal of K i must be accepted by the successor K i+1. 2.If all other proposals are rejected, the last committee can come up with their own version – and this version will always be accepted as the definite constitution. t2t2

12. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 12 An Example: The Scenario With Two Committees Initial Point in t 0 : K 1 starts to work. t 1 : K 1 proposes status quo. t 1 : K 1 proposes to become a dictator K 2 / T 2 receives no compensation. t 1 : K 1 proposesequal rights. t 1 : K 1 proposes to become a dictator, but offers bribe. t 1 : K 1 proposes T 2 should become a dictator.

13. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 13 An Example: The Scenario With Two Committees Initial Point in t 0 : K 1 starts to work. t 1 : K 1 proposes status quo. t 1 : K 1 proposes to become a dictator K 2 / T 2 receives no compensation. t 1 : K 1 proposesequal rights. t 1 : K 1 proposes to become a dictator, but offers bribe. t 1 : K 1 proposes T 2 should become a dictator. t 1 : K 2 accepts K 1 s proposal. t 1/2 : K 2 rejects and proposes T1 should become dictator. t 1/2 : K 2 rejects and proposes equal rights. t 1/2 : K 2 rejects and proposes to be- come dictator, but compensates T 1. t 1/2 : K 2 rejects and proposes status quo. t 1/2 : K 2 rejects and proposes to be- come a dictator.

14. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 14 Solving the Scenario With Two Committees by Backward Induction Initial Point in t 0 : K 1 starts to work. t 1 : K 1 proposes status quo. t 1 : K 1 proposes to become a dictator K 2 / T 2 receives no compensation. t 1 : K 1 proposesequal rights. t 1 : K 1 proposes to become a dictator, but offers bribe. t 1 : K 1 proposes T 2 should become a dictator. t 1 : K 2 accepts K 1 s proposal. t 1/2 : K 2 rejects and proposes T1 should become dictator. t 1/2 : K 2 rejects and proposes equal rights. t 1/2 : K 2 rejects and proposes to be- come dictator, but compensates T 1. t 1/2 : K 2 rejects and proposes status quo. t 1/2 : K 2 rejects and proposes to be- come a dictator.

15. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 15 Case I: Conditions Necessary to Guarantee a Constitution Free of Rent Seeking Solving the game by backward induction identifies the following features: (2)A committees proposal will only be accepted by the successor, if it offers the successor at least the same level of welfare they can secure for themselves by setting up their own proposal.Bribing the successor may work becoming king without support doesnt – Exception: The last committee. (3)The amount necessary to be paid out as bribes increases as the number of committees available as next successor increases. Number of candidates increases incentive to refrain from rent seeking. (1)Costs of delay increase the willingness to accept the predecessor's proposal.

16. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 16 Solving the game by backward induction identifies the following conditions: (4)If a proposal is rejected by the successor, the committee has no influence on the results of the remaining game stages and will be treated as non-existent. Proposal = One-shot-trial. Risk-aversion decreases incentive for selective bribing. (5)Still the bargaining position of the second committee is too weak: The principal strengthens the second committees position by declaring that he will ex ante reveal the identity of the third committee in public before the second committee starts to work (principals revelation). A minimum of five committees is required to ensure a constitution, free of rent seeking. Case I: Conditions Necessary to Guarantee a Constitution Free of Rent Seeking

17. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 17 Game is played by five committees. Case II: The Game of the Committees is Able to Protect Those in the Shadows Sector where at least one strategy of rent seeking dominates the proposal of a morally justified Social Market Economy.

18. Schweizer Armee Höhere Kaderausbildung der Armee Militärakademie an der ETH Zürich The Game of the Committees: A Design to Overcome Rent Seeking? Peter T. Baltes, Zurich 2010 18 Economics of Information: Replacing Paretian Welfare Economics with Neokantian Economics? Conclusions and Further Research Model offers an economic perspective on Why committees?committee mania / Kommissionitis. The relation between General Economics and Economics of Defense: Not a one-way street. Adam Smith and the tradition of the neutral observer and umpire Paradox? In many relevant cases there can be no neutral observer because neutrality implies having no stakes in the issue, but without stakes the person lacks the required information. Further research: Streamlining the mechanism / generalization of the results. I suggest we drop the words Pareto optimality and thus shorten our articles by perhaps five-tenths of a percent. Gordon Tullock (1999) A better understanding of rent seeking?