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Weingast and Marshall. 1988. The industrial organization of Congress; or, Why legislatures, like firms, are not organized as markets. Journal of Political Economy 96 (February): 132-68.

In Brief

The authors seek to address this puzzle:

"Legislators pursue their reelection goals by attempting to provide benefits to their constituents (assumption 1). Acting alone, they cannot succeed (assumption 3). This, in combination with the diversity of interests they represent, generates gains from exchange and cooperation among legislators. But what institutions underlie--and enforce--this cooperation?"

So why are legislatures organized like firms, not markets? A legislature's internal organization serves the same purpose as a firm's: To keep transactions costs under control.

• X: transaction costs
• Y: legislative institutions/rules--in particular, the committee system.

Place in the Literature

The literature gives us an old, inadequate model of legislatures: the vote trading ("logrolling") model. This model recognizes (correctly) that legislators can gain from a market in legislative votes/support (logrolling):

"By giving away votes on issues that have lower marginal impact on their district (and therefore on their electoral fortunes) in exchange for votes on issues having a larger marginal impact, legislators are better off. Whether or not they incorporate an explicit auction, models of the legislative market for votes have considerable appeal."

However, simply concluding that these incentives for vote trading will lead to actual vote trading is incorrect.

"A careful inspection [of this overly simple view of logrolling], however, reveals that this approach assumes away some of the deepest problems plaguing legislative exchange. It assumes, for example, that all bills and their payoffs are known in advance; that is, there are no random or unforeseen future events that may influence outcomes or payoffs."
...
"A variety of exchange problems arise because the value of today's legislation significantly depends on next year's legislative events. Members of future sessions face incentives different from those faced when the trade occurred and may seek, for example, to amend, abolish, or simply ignore previous agreements."

Main Problems with the Vote Trading Model

Because the vote trading model ignores institutions, it succumbs to a couple of problems.

1. Noncontemporaneous proposals: Even if two legislators agree to exchange votes (so one can have a dam and one can have an agency), the first can abandon the second once his dam is built and stop supporting the agency.
2. Nonsimultaneous votes: Not all votes are held at the same time. If I need your support today, but you need mine next year, I can't give you an IOU that would be credible. We can't foresee all the possible ways things can change between now and then (incompelte contracts).

Reputation (repeated interaction) is not enough to solve these problems.

Main Argument

The authors seek to replace the vote-trading model with an institutional model inspired by theories of the firm (see Coase 1937). The particular legislative institution they focus on is the committee system.

Committees are defined by three characteristics:

1. each committee holds monopoly rights for changing policy in a given domain; this makes committee seats valuable; # seniority is a property right that legislators hold; once you bid your way onto a committee, you can't be removed from it as long as you remain in the legislature;
2. when a seat does become vacant, it is filled through a bidding mechanism.

Implications:

1. So with the example of the dam and the agency, since your committee oversees the agency, I can't lower funding to your agency unless your committee allows a floor vote on the proposal.
2. Rather than exchange votes, members of each committee exchange agenda control over their committee's domain. So, although several policies are in the winset of the status quo, my committee determines which ones are voted on (and therefore adopted). This largely eliminates the need to trade votes.
3. Since legislators must bid scarce resources (comment: unclear what specific resources, though) to fill a vacant seat, legislators will seek to place themselves on committees that can provide the most benefits to their constituents (relative to other committees).
4. Vote-trading coalitions will tend to form within, not across, committees.

Generally:

"Instead of trading votes, legislators in the committee system institutionalize an exchange of influence over the relevant rights. Instead of bidding for votes, legislators bid for seats on committees associated with rights to policy areas valuable for their reelection. In contrast to policy choice under a market for votes, legislative bargains institutionalized through the committee system are significantly less plagued by problems of ex post enforceability."