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Choosing Institutional Microfeatures:Endogenous Seniority
Kenneth A. Shepsle Harvard University
Keynote Address
Second Annual International ConferenceFrontiers of Political Economics
Higher School of Economics and New Economics School Moscow
May 29-31, 2008
Introduction
INSTITUTIONS:
• Imposition -- institutional designers
• Choice -- institutional players
• Emergence -- historical process
Ubiquity of Seniority
• Legislatures
• Age grading
• LIFO union contracts
• PAYG pensions
• Academic & bureaucratic grade-and-step systems
Previous Modeling Approaches
• Binmore’s Mother-Daughter game
• Hammond’s Charity game
• Cremer and Shepsle-Nalebuff on ongoing cooperation
Can an equilibrium privileging a senior cohort or generation be sustained?
Modeling the Choice of Institutions
• Legislators choose a seniority system • Tribes select and sustain ceremonies and rights-of-
passage between age-grades
• Unions and management negotiate last-in-first-out hiring/firing rules
• Social security and pension policies are political choices
• Grade-and-step civil service and academic schemes are arranged or imposed
McKelvey-Riezman
• Three subgames – institutional, legislative, electoral
• Definition: A legislator is senior in period t if he or she was
–a legislator during period t-1
–reelected at end of period t-1
McKelvey-Riezman Institutional Subgame
Majority Choice: In period t shall seniority be in effect? (yea or nay)
Yea
Seniors have higher initial recognition probabilities
Nay
The recognition probability is 1/N for all legislators
McKelvey-Riezman Legislative Subgame
– Baron-Ferejohn Divide-the-Dollar
– Random recognition with probabilities determined by seniority choice
– Take-it-or-leave-it proposal
– Recognition probabilities revert to 1/N if proposal fails
McKelvey-Riezman Election Subgame
– Voter utility monotonic in portion of the dollar delivered to district
– Legislators care about perks of office (salary) and a %age of portion of dollar delivered to district
– Voters reelect incumbent or elect challenger
– Incumbent and challenger identical except former has legislative experience
McKelvey-Riezman Time Line
–Decision on seniority system
–Divide-the-dollar game
–Election
McKelvey-Riezman Main Result
– In institutional subgame, incumbents will always select a seniority system
– In equilibrium it will have no impact on legislative subgame
– Because in the election subgame it will induce voters to re-elect incumbents
McKelvey-Riezman Main Result: Remarks
• Implication: In equilibrium all legislators are senior
• Implication: Divide-the-dollar game observationally equivalent to world of no seniority. But seniority has electoral bite
McKelvey-Riezman Main Result: Remarks
• Seniority defined as categorical (juniors and seniors) and restrictively
• Recognition probability advantage to seniors only initially
• In a subsequent paper they show that rational legislators would chose the “only initial” senior advantage, not “continuing” advantage
Muthoo-Shepsle Generalization
• Seniority still categorical
• But the cut-off criterion is an endogenous choice
Muthoo-Shepsle Generalization: Institutional Subgame
• Each legislator identified by number of terms of service, si
• s = (si) state variable
• Each legislator announces a cut-off, ai
• The median announcement is the cut-off
s* = Median {ai}
Muthoo-Shepsle Generalization
• si > s* → i is senior
• s* = 0 → no seniority system
• s* > maxi si → no seniority system
Muthoo-Shepsle Generalization: Basic Set Up
• For cut off s*, let S be the number of seniors
• 1/S > pS > 1/N – senior recognition probability
(pS ranges from 1/S if only seniors are recognized to 1/N if seniors have no recognition advantage)
• pS = (1 - S pS)/(N – S) – junior recognition probability
• pS < pS
Muthoo-Shepsle Generalization: Results
• Lemma (Bargaining Outcome). For any MSPE, state s, and cut off s* selected in the Institutional Subgame and discount parameter δ:
– If S=0 or S=N, then all legislators expect 1/N of the dollar
– 0 < S < N, then the expectation of a senior (zs) and a junior (zj):
zs = δ/2N + (1 – δ/2)pS
zj = δ/2N + (1 – δ/2)pS
• Expected payoff monotonic in recognition probabilities for each type
• Lemma (Incumbency Advantage). In any MSPE voters re-elect incumbents.
Muthoo-Shepsle Generalization: Results
Theorem (Equilibrium Cut Off). If pS is non-increasing in S and pS is non-decreasing in S, then there exists a unique MSPE outcome for any vector of tenure lengths s in which the unique equilibrium cut off, selected in the Institutional Subgame is
s* = sM
where sM is the median of the N tenure lengths in s.
• A seniority system is chosen and the most junior senior legislator is the one with median length of service.
Muthoo-Shepsle Generalization: Results
•Alternative seniority system?
•Definition. For s any element of s, P(s) is a probability-of-initial-recognition function.
•Theorem (Alternative seniority system). If a legislator is restricted to announce P(s) non-decreasing in s, then he will announce
0 if s < si
Pi(s) = 1/N(si) if s > si
where N(si) is the number of legislators whose length of tenure is at least as high as si
Muthoo-Shepsle: A Summing Up
• Under specified conditions the legislator with the median number of previous terms served will be pivotal
• She will set the cut-off criterion at her seniority level, even if she can offer a more fully ordinal schedule
• Selected categorical seniority system: most junior senior legislator has median number of previous terms of service
THANK YOU!