Rent-Redistribution Optimization

4.1 Rent-Seeking and Rent-Extraction

In the previous section, I presented the different theories used so far to justify unamendability and their shortcomings. In this section, I look into the institutional economics literature for a novel justification for eternity clauses and restraints on the amendment process.

First, special advantages in themselves are not negative; namely, they ensure that there will be an investment in the production of a good from the enjoyment of which an individual cannot be excluded once that is produced (public good).^[338] All regulations are connected with such advantages (rents); the question is how to make the process of rent-acquisition less costly for social welfare.^[339] Olson argued that the existence of rents is one of the determinants of the fail of nations.^[340] Nevertheless, rents themselves are usually redistribution, i.e., the winner can compensate the loser. Subsequently, for many years, economists claimed that rents created only a negligible deadweight loss (loss in efficiency).^[341] In his seminal work, however, Tullock suggested, that when measuring losses in efficiency due to rents, one must also take into consideration the unsuccessful investments to acquire rents and the distortion in the allocation of resources in maintaining rents.^[342] These investments have been later coined as rent-seeking.^[343]

Posner with a very simple model proclaimed that all rents are dissipated in rent-seeking (full dissipation hypothesis) and, therefore, any expenditure toward acquiring rents is socially undesirable.^[344] Nevertheless, Tullock by looking into rent-seeking as a first-price all-pay auction for rents disproved that hypothesis.^[345] Consequently, he implied that the goal is not to condemn all rent-seeking but to minimize the dissipation of rents.

Buchanan and Congleton looked at the problem of wasteful rent-seeking as a problem that could be mitigated by generality. By decreasing the allowed specificity of the rule a regulator can introduce, it is harder for the regulator to distribute discriminatory rents.^[346] According to contest theory, another way toward reducing dissipation is the manipulation of the process of rent-seeking.^[347] Eternity clauses manipulate the process by making redistribution of rents very costly. Specifically, eternity clauses appoint violation costs in terms of legitimacy (coordination losses) upon certain shifts (redistribution). Subsequently, they act as a barrier to entry (BtE) in political competition over certain matters.^[348] With eternity clauses, citizens [would] benefit [...] by avoiding a wasteful struggle over abstract rules.^[349]

In order to make the argument clear, I will use one of the simplest BtE, i.e., high sunk costs. Sunk costs are the part of the investment that cannot be retrieved, if the competitor leaves the market. In political competition, most costs are non-retrievable. For example, if an interest group that has invested in lobbying “drops” the topic, then it cannot get its campaign contributions back. In order for an interest group to bring forth the amendment of an unentrenched provision, it must invest so that at least the costs of an amendment are covered. Contrary, in order to bring a change to the eternal part of a constitution, an interest group has to bear at least the cost of constitution-making. Since constitution-making is correlated with higher costs, the marginal competitors will not enter a competition on attaining the rents. On the one hand, some competitors may not be able to finance the minimum investment in absolute terms. On the other hand, the expected benefit may not be able to offset their costs, i.e., rent-seekers valuing the shift less will not enter the competition. This situation, in turn, enables the beneficiaries of the status quo to save on the investments needed to protect themselves from rent-seekers.

At this point, it needs to be reminded that the goal is not to avert all rent-seeking but to avert inefficient rent-seeking. As noted already, often public goods arise as a by-product of rent-seeking. If there is a constant threat of regulatory capture, i.e., either the regulator redistributing the rents or the executive using executive decrees to change the regulation, then the willingness of participants to invest in long-term rents will be lower. Contrary rent-seeking for short-term extractive rents is more likely.^[350] Furthermore, introducing a process that is not targeted against the marginal rent seeker would be undesirable. In other words, when interest groups face sig­nificant benefits from a shift, they might still be willing to violate the constitution, if that is the only way to their preferred setting. In that sense, eternity clauses would be inducing constitutional instability.

The optimization approach proposed focuses on areas where constant renego­tiation is not desirable. For example, allowing the amendment of term limits, leaves space for presidents to bargain with the rest of the political actors to prolong their term. Specifically, in order to achieve an amendment, presidents need to compen­sate the rest of the veto players. Subsequently, they indulge themselves in rent-seeking concessions and vote trading. If all presidents act as rent-seekers then less true policy making and more politics would be exercised.

Another side of the problem of redistributing rents is rent-extraction. In his seminal work, Stigler described the introduction of regulation as a process through which politicians gain private benefits.^{[351] [352] As we have discussed, rent-seeking involves the supply of rents from politicians against a demand for regulation by the interest groups (free transaction). Rent-extraction is a practice going a step further. The term is used to describe the phenomenon of regulators using their competences, in order to secure transfers, ego-rents9 by threatening to introduce unfavorable regulation (coercive transaction).}

One of the effects of rent-extraction is that economic growth is harmed. The argu­ment is very intuitive. Growth requires long-term investments. The goods or services exchanged with long-term contracts cannot be as efficiently attained on the on-spot market. Nevertheless, when citizens or potential investors perceive a danger of rent-extraction, then their willingness to undergo long-term investments is lower.^[353] That is to be attributed to the fact that long-term contract have a lock-in effect. First, such contracts are usually connected with investments that require high asset-specificity.^[354] However, the higher the asset-specificity, the easier it is for a regulator to extract rents. Specifically, investors that cannot shift investments toward another sector or another venture face a choice: they can pay the ego-rent and avert disadvantageous regulation, accept the disadvantageous regulation or abort the investment. If entering and exiting a market is not costless, the fear of investors that regulators will drive their costs up (or limit profits by imposing price ceilings) and force them out of the market ceteris paribus will avert the marginal investor from entering. Subsequently, countries that manage to reduce the fear of rent-extraction should face greater economic growth.^[355]

By introducing an amendable constitution the commitment problem, i.e., that once the investment is done the constitution will not be amended, is only partially resolved. Making rents non-redistributable is a mechanism to solve the commitment problem. By crystallizing the distribution of rents in an unamendable part of the constitution introducing unfavorable regulation or reverting previously beneficial regulation is very costly. As already discussed, the marginal politician will drop out of the market (supply side). Subsequently, the threat of unfavorable regulation is less credible, if rents are protected by eternity clauses.

This conception of eternity clauses has the additional benefit of providing a plausible explanation of why—from a positive perspective—a rational assembly member would write such a constitution. The argument in favor of such choice is the following. Eternity clauses can empower politicians. Specifically, when present constituencies are called to invest, the degree to which they can be certain that returns on investment will be positive in the future is determining the size of the investment. Eternity clauses are an additional guarantee that future majorities will not be able to expropriate that returns. Subsequently, in cases where certainty is increased, the resulting increased growth will enable politi­cians with the same or even lower taxation to collect higher state revenues. As a result, they can implement a wider range of policies in their effort to gain votes. For that reason, also from a positive perspective, the proposed justification seems to perform well.

4.2 Justifying Through Rent-Redistribution Optimization

By examining the justifications found in the literature, it became clear that they were only answering part of the question. That was a result of not having examined the potential costs and benefits of eternity clauses to their full extent. In order to claim that a certain legal instrument is desirable, we must not only look into what we want it to do but also in whether the goals we set are attainable with the constraints under which we are acting.

First of all, I discussed the theories arguing that eternity clauses are desirable inasmuch as they protect rules introduced by benevolence (or the least malevo­lence). They claimed that since constitution-making is an extraordinary moment, then we need to protect it from ordinary rule making. Although the argument seems appealing, I have shown that it is at best flawed. Framers act differently but not necessarily less self-oriented.

Then, I discussed the theories that look into the symbolic significance of eternity clauses.

Eternity clauses might actively perpetuate minor inefficiencies. Nevertheless, as shown, not changing some of the rules during the game might be one of the necessary evils for sparking long-term investments and the realization of cost-savings. Subsequently, a two-stage test is needed that balances these two aspects. This test needs further take under consideration the characteristics of the rule. Not all rules are the same. On the one hand, some rules are already entrenched through internal (informal) institutions and path dependencies. On the other hand, some rules allow for regulation with significant distributional effects that eternity clauses do not suffice to avert a change. The test proposed checks whether eternity clauses can fulfill their function in an efficient way, i.e., avert the least benefited parts of the society from indulging in rent-seeking, without unbearable costs due to rigidity.^[356]

The first question asked is a question of necessity, i.e., are eternity clauses needed or lesser degrees of amendment constraint would also be enough to avert wasteful expenditure? The second question asked is a question of sufficiency, i.e., are eternity clauses sufficient or even these would be violated due to the high benefits of a shift? Specifically, as a first step, the framers should first compare the total cost of using eternity clauses with the cost of lesser entrenchment for the relevant rules. Toward that goal, it is important to take into consideration the rent differential between the winners and the non-winners in the long run. Thus, as a second step, this differential should be compared to a cut-off point, where the cost of amendment exceeds the cost of violating an eternity clause, i.e. breaking the constitution.

Similar to Buchanan and Tullock’s calculus,^[357] eternity clauses require a com­plicated interdependence calculus. One part of the calculus consists of the following consideration. On the one side, assembly members are asked to estimate the cost of a constitution delivering a weak promise for the future. These costs decrease as rigidity increases. On the other side, they need to estimate the political costs in order to come to an agreement in favor of certain provisions. These costs increase as rigidity increases. As a result, rigidity would ideally be set where the sum of these costs minimizes. However, that might not be possible.

As long as social welfare is not the same with and without eternity clauses it is important to see what are the pros and the cons of both constitutional settings. The second step of the test requires an explicit weighing of the opportunity cost of using eternity clauses instead of other lesser entrenchment. Eternity clauses impose the cost of the risk of constitutional breakdown due to the increase in rigidity. Depending on the rule being entrenched, the rent differential between the winners and the non-winners might be very high. Thus, increasing rigidity for such distri­butions does not increase the strength of the promise.

To put it simply, the benefits of entrenchment disappear when the rent differ­ential exceeds the cost of drafting a new constitution. As a result, in such cases even when eternity clauses are introduced they will only be parchment barriers, which to that extent undermine the credibility of the constitution. Furthermore, drafters need to consider the risk of impeding innovation.^[358] Moreover, playing the constitutional game once (one-shot game)^[359] with high stakes induces the players to invest more in this single round than, if the rent could be redistributed in the future (costly constitution-making). However, as said eternity clauses benefit in the short-run society by facilitating positive growth due to long-term investments (reduction in rent-extraction) and the effective avoidance of wasteful spending in rent-seeking in the long run.

On the other hand, without eternity clauses, constitution-making is not as costly. In addition to that, due to constitutional flexibility, change is ceteris paribus not inhibited and mistakes on the initial text could be removed. Nevertheless, each society must weigh the potential losses due to lesser or even a negative growth and the losses due to rent-seeking expenditure. The second step tells us that only when the social welfare of the entrenched state outweighs the social welfare of the unentrenched state should eternity clauses be used.

As becomes obvious this part of the test manages to incorporate fairness con­siderations, without falling victim of moralism.^[360] Thus, it disentangles eternity clauses from concerns of fairness. Whether a rule is considered fair or not at a specific time does indeed influence whether a rule will be included in the consti­tution. However, a justification is important to the extent that it allows us to for­mulate constraints. As long as there is no universal and abstract definition of what constitutes fairness, justifications become subjective. Nevertheless, different fair­ness conceptions have different distributional effects, which can be objectively observed. Subsequently, the test covers the gap for a more objective justification.

At this point, two issues need to be discussed. First, the barriers to amendment set by eternity clauses are derivative barriers. Specifically, constitutions even without eternity clauses have a lock-in effect. Path dependencies, political transaction costs or coordination benefits act as barriers against many amendments. The barriers set by eternity clauses are efficient inasmuch as these barriers are functioning. Subsequently, eternity clauses become stronger as the constitution becomes a stronger constraining device. If the constitution is a weak coordination device, including eternity clauses cannot have a significant negative impact on rent redistribution on its own. Therefore, the justifiability of eternity clauses in new constitutions or on countries with a history of weak formal institutions is at best questionable. In a worst-case scenario by reducing flexibility, the framers might condemn the constitution to failure.

Second, it is claimed that obvious inequalities and rules with strong distributive effects would not pass the test. It seems intuitive that high-rent differentials would always compensate the costs of drafting a new constitution. Nevertheless, even if we relax that assumption, a highly (economically) divided society suffers from high political instability^[361] and faces a constant risk of revolution.^[362] Subsequently, the benefits of entrenching a dividing social setting will have to be discounted due to the political instability. As a result, in the second step, the discounted utility of the entrenched state will only exceptionally—if ever—exceed the utility of the unen­trenched state.

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