We derive the equilibrium institutional design of representative democracy by citizens who first vote on the supermajority required for a new policy to be adopted, and then delegate decision making to a legislature that selects policy given that institutional constraint. A legislature that can freely tailor policy to reflect society's current preferences is good. However, the views of the median legislator or agenda setter may differ from the median citizen's, and an unchecked legislature can implement bad policy. We characterize how the primitives describing the preferences of actors and the status quo policy affect the equilibrium degree of legislative flexibility. * We gratefully acknowledge the helpful suggestions of Odilon Camara and participants of the 2011 Xiamen
Abstract:We develop a spatial model in which consumers receive firm-specific location shocks and firms endogenously determine both franchise/product locations and prices. Remarkably, firms fail to profit from endogenous productspecific heterogeneity alone: while ex-post consumer heterogeneity ensures positive gross profits, competition for market share results in socially excessive product lines and zero net profits. With added exogenous taste heterogeneity, endogenous spatial heterogeneity drives profits below their levels with only taste heterogeneity. Finally, we introduce multiple product lines and show that when product costs differ across lines, firms earn positive profits as long as consumer preferences over lines are imperfectly correlated.
We develop a spatial model of oligopolistic competition in which firms simultaneously choose franchise locations and prices, and consumers receive uncorrelated firmspecific location shocks. Remarkably, when firms only differ along the endogenous contestable spatial dimension, they earn zero profits: while ex-post consumer heterogeneity ensures positive gross profits, competition for market share via franchise/product location results in over-provision of franchises and zero net profits. More generally, if firms face different franchise costs, the disadvantaged firm breaks even. Only when we introduce exogenous non-contestable taste heterogeneity across consumers, do both firms extract positive profits. But even here, franchise competition reduces firm profits.
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