Constitutional choice in representative democracies

Since Buchanan and Tullock established the foundations for the economic theory of constitutional choice in representative democracies over 25 years ago, there has been no direct and comprehensive test of the theory. In this paper I have modified Buchanan and Tullock's theory and provided an empirical test of the modified theory. I modified Buchanan and Tullock's constitutional choice theory in two ways. First, the costs of voting are viewed from the perspective of single wealth-maximizing developer, rather than the sum of the costs faced by each group member. The resources consumed in affecting and avoiding wealth transfers within the voting organization, rather than the transfers themselves, thus determine the optimal structure of the organization. Second, I treat the agency costs that arise from the divergence between the interests of representatives and those of their constituents separately from the costs of wealth transfers among groups of voters. Condominium owner associations, which possess many of the same features of political representative democracies, were used to test the theory. Voters in such private organizations elect representatives who make decisions regarding levels of “public” expenditure and assessments. The behavior of these representatives is subject to various constraints, including regularly scheduled elections, recall, and referenda. While they are similar in many respects, the study of condominium associations has some significant advantages over investigations of purely political voting. In particular, since the constitutions of condominium associations are written by a single wealth-maximizing developer, the initial maximization process can be clearly defined. Further, the availability of data makes empirical testing of the theory tractable. Analysis of the chosen structure of condominium associations yielded results which, though not definitive, are generally consistent the economic theory of constitutional choice. As expected, increased representation, shorter terms of office, and voter referenda all act as substitutes for one another in constraining the behavior of representatives. Increases in the severity of one of these controls tends to decrease the optimal level of the others. In addition, less restrictive controls on representative behavior are chosen when the cost of implementing those controls are high, as is the case in large voting groups. The choice of the voting rule to initially elect representatives, varies with the heterogeneity of the voting group, and the probability that representatives will face decisions involving large transfers of wealth. As expected, the more heterogenous the voting group, the more likely that voting rules which decrease the potential for wealth transfers and thereby provide protection for minority interests will be chosen. Similarly, the greater the potential for wealth-transfer opportunities, the greater the protection which will be afforded minority interests. The evidence presented here is, of course, only one test of the theory. The results are based on a relatively small sample of condominiums and identification of the model required a number of restrictive assumptions. However, the robustness of the results could be explored in a number of ways. Since the sample employed in this study included condominiums from a single state, New Mexico, additional tests could be done on the choice of constitutions for condominiums in other states, which have different legal constraints on the structure of condominium associations. Further, other private and political voting organizations could be studied to further test the general validity of the results obtained in this study.