The Bargain between the Elite and the Majority to Control Politicians and Managers: Party and Managerial Ideologies as Devices to Align Agents

Abstract:     
How can office-seeking politicians or managers be aligned with social welfare or firm welfare, given that such agents have a suboptimal incentive to cater to majority preferences in situations with low participation costs and to elite preferences in situations with high participation costs? In the for-profit firm, the primary elite-majority bargain to reduce agency costs involves the creation of an electorate of shareholders who as residual claimants are better aligned with firm welfare than other groups. In democratic politics, where there is no comparable group of residual claimants who are aligned to social welfare, an efficient elite-majority bargain involves the creation of competing party ideologies that serve to check opportunism by majorities in low participation-cost scenarios and by elites in high participation-cost scenarios, and in doing so align politicians with social welfare. In non-profit firms that also lack a residual claimant, an efficient elite-majority bargain involves a parallel creation of managerial ideologies. Such managerial ideologies may also have utility in the for-profit firm as a supplementary device to foster alignment with firm value.

Keywords: transaction costs, allocative efficiency, altruism, models of political processes, conflict, conflict resolution, alliances, asymmetric & private info, corporate governance, structure & performance of gov't, general legal, corporate culture

JEL Classifications: D23, D61, D64, D72, D74, D82, G34, H11, K40, M14

Working Paper Series