Transactions Costs and Coalition Stability under Majority Rule

In this paper we examine the discrepancy between theoretical predictions of unstable majorities and observed stability. Minimum winning coalitions divide program benefits among their members, creating incentives for those left out to entice defection by offering rewards to those who leave and form a different coalition. New coalitions emerge, leading to cyclical majorities, short-term programs, and highly skewed distributions of program benefits. Empirical evidence, however, reveals much more program continuity and equal allocations than the theory suggests. We offer additional evidence of broad, stable sharing in many programs enacted by Congress by describing interstate distributions from the Federal Highway Trust Fund (HTF). The allocation formula for the HTF was initiated in 1916, but despite wide divergence across the states in growth of various economic factors over the rest of the twentieth century there were comparatively limited HTF allocation adjustments. We also examine overall federal expenditure and tax shares among the states from 1975 to 1997 and show that there has been a similar continuity in the interstate distribution of federal funds and taxes. To understand this observed stability and use of relatively egalitarian sharing rules, we emphasize the desire of politicians to minimize the high transactions costs of negotiating and enforcing political coalitions. Politicians have incentive to prevent unraveling of political agreements in order to avoid the costs of searching for new coalition partners, reaching agreement on the nature and distribution of program benefits and costs, and verifying compliance. Moreover, legislators seek to protect constituent benefits accruing from long-term programs that would be lost if coalitions unraveled. Accordingly, we argue that politicians assemble greater than minimum-sized coalitions to build broad political support for their legislative programs, offering benefits to a larger constituency in exchange for additional votes. Considerable negotiation over the distribution of program benefits and costs may be required, so that once agreements are reached, politicians will be loath to consider a major reallocation that could undermine the coalition.