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Incomplete Social Contracts

Author

Listed:
  • Philippe Aghion

    (Harvard University and University College London,)

  • Patrick Bolton

    (Princeton University,)

Abstract

There is a long normative 'Social Contract' tradition that attempts to characterize ex-post income inequalities that are agreeable to all 'behind a veil of ignorance.' This paper takes a similar normative approach to characterize social decision-making procedures. It is shown that quite generally some form of majority-voting is preferred to unanimity 'behind a veil of ignorance' whenever society faces deadweight costs in making compensating transfers. Deviations from unanimity (or ex-post Pareto optimality) are exante efficient to the extent that they economize on costly compensating transfers. Put another way, the optimal decision rule trades off the benefits of minority protection and those from greater flexibility. (JEL: H11, G33, G34, D63, P16, P48) Copyright (c) 2003 The European Economic Association.

Suggested Citation

  • Philippe Aghion & Patrick Bolton, 2003. "Incomplete Social Contracts," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 38-67, March.
    • Handle: RePEc:tpr:jeurec:v:1:y:2003:i:1:p:38-67
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    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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