Voting with decentralized policy contingent payment promises

Session 4: Dynamic Control and Equilibrium Problems

Abstract: We examine a model where a committee adopts or rejects a reform based on voting. The reform is efficient but the committee may reject it because committee members have heterogenous intensity of preferences for the reform. Committee members can freely make enforceable payment promises contingent on the committee decision. The payment promises are zero sum but can involve coalitions of any size ranging from a pair to the entire committee. We define equilibrium payment promises by 1) precluding blocking coalitions who can make internal payment promises and lead the group to reject the reform and, 2) minimizing the aggregate payment. We find that Equilibrium payment promises exist and are indeterminate. All equilibria have however some common characteristics. First equilibria enable the committee to chose the socially optimal decision and remove inefficiencies resulting from voting externalities. Second, all equilibria require top-down payments from members with high intensity of preferences to members with low intensity of preferences for the reform. Third, when the voting outcome is inefficient, payment promises restore efficiency because intense minorities compensate the members of the majority to entice them to vote for the efficient decision. Fourth, when the voting outcome is efficient, payment promises may be required to preempt losing coalition opposing the reform to entice the least intense members of the majority supporting the reform voting against the reform thereby leading the group to reject the reform.

(Based on joint work with Jianfeng Zhang).