On the Inefficiency of Political Exchange

Abstract

A classic argument in economic theory is that in a world of zero transaction costs the free bargaining among parties spontaneously leads to an efficient allocation of resources. Attempts have been made by many economists to apply such an argument to the field of politics. In contrast to market exchanges, political exchanges have been widely criticized on ethical grounds. Going beyond the well-known moral criticism regarding the exchange of votes, the paper attempts to demonstrate how in politics, ethics and economics can go hand in hand. Specifically, it proposes an unusual perspective on transaction costs, by arguing that the enhancement of such costs can be required to achieve efficient results in specific circumstances, where the free bargaining among parties conflicts with the public issue to be addressed. This suggests the basic idea that, while in markets transaction costs should be reduced, in politics, they may require to be enhanced.